What the Fed Rate Increase Means
Dec. 14, 2016 (EIRNS)—The Federal Reserve gave its reaction today to the statements and expectations of a Trump Administration for major new spending on economic infrastructure, and on the military. Regional Fed presidents such as Boston’s Eric Rosengren had already stated in early November, that any such national investment plans would be met by the bank with three interest rate hikes in 2017. Thus the "surprising" announcement by Chair Janet Yellen today—of an immediate quarter-point rise in the discount rate now, to be followed by three more next year—should not have been a surprise. It represented the Fed’s clearly indicated reaction to any move to end six years of budget and credit austerity across the trans-Atlantic region: Try to stop it. The Fed’s new push up on short-term rates will accelerate the rise in long-term rates which has already begun, making any new U.S. Treasury borrowing rapidly more expensive.
To questions after the announcement, Yellen answered obliquely but implied the Fed’s opposition. A new investment program "is clearly not needed to achieve full employment," she said; and "the ratio of debt to GDP must be kept in mind."
At the same time, the Fed’s new economic growth forecasts for the United States, issued today, still see no annual growth over 2% through 2019, and below 2% for most of the next three years. In current fact, U.S. industrial production in November fell by 0.6% from a year earlier, making the 15th consecutive month of such year-to-year drops; production is lower now than in the Fall of 2014.
Yet, while "forecasting us" into such a continued no-growth future, Chair Yellen and the Fed still wanted to "quietly" enforce budgetary and Federal credit austerity. Zero rates were for the benefit of large banks and large multinational corporations only; not for savers, employees, small businesses, nor governments which try for rapid economic development.
In Europe, rates are still near zero or below. Handelsblatt reported today that the 30 big German corporations in the "DAX Index" have increased their debt/cash-flow ratio by almost 50% since 2008, drastically increased their stockholder dividends and repurchases of their own stock, and their takeovers; increased their "risk appetite," and decreased their capital investments.
A few corporations, like consumer-goods giant Henkel, have even been borrowing at negative rates. So has Finance Minister Schaeuble—as long as he used it to balance the budget only!
One example suffices: Bayer’s just-approved takeover of Monsanto will take 50 billion euros in borrowing by Bayer in late 2017. If at the 1% at which Bayer has been borrowing, the new annual debt service will be €1 billion; if at 5%, it will more than wipe out even Bayer’s record 2015 profit of €4.1 billion.
It was the failure and cancellation of exactly such large leveraged buyouts as this, which was an early- to mid-2007 harbinger of the failure of investment banks and the blowout of the financial system.
As for credit for new infrastructure-building, it will be found only through a Hamiltonian national banking institution.