Goodbye QE, hello rate rises? Not so fast.....

 A Landmark - L.S. Lowry

My latest at Pieria debunks the notion - heavily promoted by hawkish analysts and impatient journalists - that the FOMC's announcement that QE has ended means that interest rate rises are imminent. And it raises a worrying question. The FOMC -and others - talk about "normalising" policy. But what does "normal" even mean? Is there such a thing as a "normal" setting for interest rates? We do not know.....

Read the post here.


  1. Rate rises out the yield curve threaten central bank balance sheet solvency, right?

    1. No. They threaten fiscal solvency, not central bank solvency.

  2. Only if the fiscal agent is a guarantor of the central bank. Mathematically, do you disagree that with high enough rates, central bank equity turns negative?

    1. In a fiat currency system the fiscal agent is always guarantor of the central bank. But you are missing the point. Interest rate rises threaten fiscal solvency because they increase the debt servicing costs for government.

      I'm not going to discuss central bank solvency on this post, sorry. It is off topic.

  3. Frances,

    I agree that we’re in “a new, strange world” where we “wandering without a map” (a point you made in the final paragraph of your Pieria article). A fundamental question that needs answering in this new world is whether government borrowing actually makes any sense. That is, why not continue with QE and QE the entire debt?

    Milton Friedman advocated a “zero government borrowing” regime. See paragraph starting “Under the proposal…” here:

    Warren Mosler advocated the same. See his 2nd last paragraph here:

    As to any inflationary effect that might come from QEing the entire debt, that is easily dealt with by raising taxes and “unprinting” the money collected. Assuming the inflationary effect of the former equals the deflationary effect of the latter, then there’s be no effect on GDP. Of course that’s easier said than done, but IN PRINCIPLE disposing of the entire debt over a few years would not be difficult.


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