Time for the Fed to Pause

Time for the Fed to Pause


Given today’s Federal debt level, the impact of the Fed’s 3.5% target rate on short-term Treasuries would create a total annual interest expense of $700 billion in 2020, equal to the entire deficit today.  An expense of this magnitude would impinge on economic growth and reduce needed spending on infrastructure.  That's a big price to pay to engage in a preemptive strike against an inflation rate that does not exist yet.

A 3.5% Federal Funds rate would also disincentive bank lending.  Parking excess cash risk-free at the Fed window at that rate would arguably be a better use of bank funds than lending into the economy at 5%, a rate the Fed has no control over. 

If the Fed continues on its projected path of rate increases, they could saddle the economy with unsustainable debt levels and an old-fashioned credit crunch.
