Several years ago when the Federal Reserve had its Fed funds rate at zero to 25 basis points (one-quarter of one percent – 0.25%), there was a great deal of talk, somehow presented as urgent, whether the Federal Reserve would raise interest rates.
RT asked me if the Fed was going to raise interest rates. I answered that the purpose of low interest rates was to restore the solvency of the balance sheets of the ‘banks too big to fail’ by raising debt prices. The lower the interest rate, the higher the prices of debt instruments. The Fed drives bond prices up by purchasing bonds, and the Fed raises interest rates by selling bonds, or by purchasing fewer of them than previously.
I told RT that a real increase in interest rates would undercut the Fed’s policy of rescuing the balance sheets of the big banks whose balance sheets were loaded up with bad debt that desperately needed a rise in debt prices for the banks to remain solvent.
This post was published at Paul Craig Roberts on June 19, 2017.