The Naked Empress.

On December 16th, The Federal Reserve Open Market Committee (FOMC) released a statement making a long awaited declaration: they are raising interest rates.

What does this really mean in a practical sense? For all the talk of the Federal Reserve raising interest rates, there is actually only one interest rate which the Federal Reserve has direct control over: the interest rate of return on excess reserves. The Federal Reserve guarantees a small interest payment to banks based on how much money they keep retain in excess reserves. The Federal Reserve claims to exercise some control over market rates by influencing the Federal Funds rate, which is the rate paid on overnight loans between banks.

In the statement, we see this:

Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent.

They aren’t targeting a specific rate. They are targeting a specific range. This clues us in to something: they don’t have control over the rate itself. The best they can do is try influencing the Fed Funds rate in that direction.

It is telling that the statement neglects any mention of the rate paid on excess reserves, which is the only interest rate that the Federal Reserve has any direct control over. Banks are about to receive a guaranteed return of 0.5% on excess reserves. This is virtually risk-free. So, no bank is going to loan money to anyone else beneath this rate. Why make a risky loan for anything at 0.5 or less, when you can get a guaranteed 0.5% in excess reserves? For that matter, why would any bank prefer loaning to the general public for slightly higher rates – 1% to 5% – when they can stash it away for a guaranteed 0.5% in excess reserves? Yes, 0.5% is not an astronomical rate; but considering it is risk-free, it is well worth it. Banks cannot find a better deal than this anywhere else.

Furthermore, the Fed Funds rate is bordering on irrelevancy. Excess reserves are far higher now than they’ve ever been. No major commercial banks are in need of overnight loans from other banks. No large bank is lent out to the point where they need loans from other banks. I have discussed this before: money in circulation nearly matches that of the money in excess reserves. The banks are nearly 100% reserved. They are not looking to make loans.

The conclusion to draw from the FOMC statement is this: the whole thing is a big farce. It means nothing. They’re wasting everyone’s time. The token targeted increase in the Federal Funds rate is a public relations stunt, and nothing more.


Janet Yellen is the current chairman of the Federal Reserve board. She was previously a Professor of Economics at Berkeley. I have no doubt that she is an intelligent woman. But read her statements and listen to her speak; she is completely incoherent. On a personal level, she lacks any semblance of articulation. But that’s not the important thing. What matters is that she’s a Keynesian. Keynesian economic theory is, by nature, incoherent and nonsensical. I have previously referred to Keynesian economists as the most insane people in government. Their theory is not supposed to make sense from an economic standpoint. The only standpoint from which it makes sense is the governmental standpoint, because Keynesian theory blesses mass deficit spending.

In her statements, Yellen tried to put a happy face on economic conditions. She has declared the economy to be expanding at a “moderate pace”. But very little has changed over the past few years. Economic indicators are appearing sluggish. The Baltic Dry is lower than ever. Christmas retail sales are piss-poor. The housing market is in the midst of another bubble. Employment seems up; but the official government statistics cannot be trusted.

There will be another recession. This is basically a fact of life. Because the world is imperfect, the economy is also imperfect. At some point, as number of bad investments made by multiple actors at once result in an economy-wide recession. The question to ask is this: when will the next recession hit? The previously mentioned indicators suggest we may have the next recession within the next few years. If it hits before 2018, Janet Yellen will still be the Federal Reserve chairman. Commentators and investors are immediately going to look to her for explanation and guidance.

But they will remember that Yellen predicted no such mention of recession. The recession at that time will have caught her with her pants down. This will damage her prestige, and severely so.

Yellen will be in a serious bind at that time. She has no options left. In the recession of 2008, Bernanke had some wiggle room: he was able to get the Fed Funds rate lowered from 5% to nearly 0%. It did not fix any of the intrinsic problems in the economy, which are still there; but it saved some of the major banks. It lessened the impact of the recession, at the time. But Yellen does not have this luxury. What is she going to do when the next recession hits? The Fed Funds rate is already barely a tic above zero. Forcing it any lower will not do anything. She is utterly trapped.

People are going to start asking her the hard questions. Why did she not see the recession coming? Why did she not warn anyone? It’ll be a rhetorical slaughterhouse at that time: Janet Yellen is far too bumbling and inarticulate to deal with severe criticism. She’s no Paul Volcker; Volcker oversaw the horrendous recession of the early 1980s, but came out relatively unscathed. He was nearly 7 feet tall. He was certainly not handsome, but he had charisma. He spoke with conviction and authority. His ubiquitous cigars only added to his character. So he was able to convince everyone that he was in control when he took a hard line against inflation. He only capitulated to pressure when the Mexican government threatened to nationalize American banks in Mexico unless he pursued inflation of the dollar.

Janet Yellen is nearly the opposite of all this. It’s not because she’s a woman and I’m sexist, which would be a Yellen supporter’s obvious reply; there are plenty of women out there who speak with conviction and authority. But Janet Yellen is not one of them. She exudes the demeanor of a slow-witted simpleton. She will not be able to “Volckerize” the recession. People are going to start asking questions about her competence. I don’t doubt that she is a competent individual. But she has faith in an economic theory based on preposterous lies. Competence is meaningless when in support of an incompetent worldview.

And can you imagine if Hillary Clinton were President at this time? Presidents ALWAYS take the blame for a recession, even though their policies often do not have much to do with a recession taking place during their own tenure. Between Janet Yellen’s clumsy ineffectiveness and Hillary’s tendency to make hysterical accusations against her opponents (“vast right-wing conspiracy”, anyone?), I think Americans would really start to lose faith in Washington DC. The leadership of two bumbling old fools does not do much to inspire.

Janet Yellen wants us to think that she has things under control. Former Chairman Ben Bernanke wanted us to believe the same thing. But when the next recession hits, Yellen will have nowhere to run. Bernanke could at least lower the Fed Funds rate. Yellen has nowhere to go. She is going to be trapped.

Yes, she can open another round of quantitative easing. In fact, this probably is what she’ll do. But reopening quantitative easing will be an implicit admission on her own part that she was completely wrong about everything. This will damage her credibility beyond repair. The Fed has steadfastly maintained that the age of QE is over, and that the economy has healed. A restarting of QE would prove that not even the Fed believes this.

So in terms of clean solutions, she has no options left. The truth should be clear already: The Empress has no clothes on. She never did.

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