The Phaserl


What Could Cause Interest Rates to Rise?

There is an interesting paradox at work as central banks suppress interest rates.

by Charles Hugh Smith, Of Two Minds:

Correspondent Mark H. recently asked: “What is your take on what the outcome will be if/when interest rates start rising?” Let’s break this excellent question into two parts: 1) what might cause rates to rise, and
2) what consequences will likely result from rising rates/yields?

There are two articles of faith in the central-bank religion:

1) We can keep interest rates near-zero for as long as we deem necessary, and

2) We can suppress inflation at will, too.

The question is: can they do both at the same time for as long as they wish?

If either interest rates or inflation (and they are correlated) start rising, the central banks’ claims of control evaporate.

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1 comment to What Could Cause Interest Rates to Rise?

  • Ed_B

    Not to worry. The Fed, and presumably other central banks are following their lead on this, have destroyed the free market in bonds, so the bond vigilantes cannot force interest rates higher when central banks and governments behave in financially irresponsible manners. There was a time when they could do this by refusing to buy the bonds of governments that were behaving badly, which threatened a failed bond auction. This is something that no government wants, so interest rates would rise until all the bonds could be sold. These days, the Fed will swoop in and buy unlimited amounts of government bonds at an interest rate that they decide is good and not one that is set by competitive bidding. Because of this, the Fed now controls both the short rates, as usual, but also now the long rates. Therefore, interest rates cannot rise unless the Fed allows them to rise. They have stated that there will be no interest rate rises until at least 2015, if not later.

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