Raising Interest Rates Is Like Starting a Fission Chain Reaction

Central bankers seem to think that adjusting interest rates is a nice little tool that they can easily handle. The problem is that higher interest rates affect the economy in many ways simultaneously. The lessons that seem to have been learned from past rate hikes may not be applicable today.

Furthermore, there can be quite a long time lag involved. Thus, by the time a central banker starts seeing an effect, it may be clear that the amount of the interest rate change is far too large.

A recent Zerohedge article seems to suggest that problems can arise with 10-year Treasury interest rates of less of than 3%. We may be facing a period of declining acceptable interest rates.

Raising Interest Rates Is Like Starting a Fission Chain Reaction Zerohedge-crises-associated-with-spikes-in-10-year-treasury-yields

Raising Interest Rates Is Like Starting a Fission Chain Reaction Zerohedge-crises-associated-with-spikes-in-10-year-treasury-yields

Let’s look at a few of the issues involved:

[1] The standard reason for raising interest rates seems to be concern about inflationary impacts occurring as a result of rising food and energy prices. In practice, the impact of such an interest rate change can be quite severe and quite delayed.

Figure 2 is an illustration from the Bureau of Labor Statistics website showing one of today’s concerns: rising energy costs. Food prices are not yet rising. Normally, however, if oil prices rise, the cost of producing food will also rise. This happens because modern agricultural methods and transportation to markets both require the use of petroleum products.

https://ourfiniteworld.com/2018/02/21/raising-interest-rates-is-like-starting-a-fission-chain-reaction/

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Raising Interest Rates Is Like Starting a Fission Chain Reaction

Raising Interest Rates Is Like Starting a Fission Chain Reaction

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