Advice for the Fed


I understand that Larry Summers and the IMF, among others, are advising the Fed not to raise rates. They are expecting the Fed to sacrifice domestic policy objectives for international objectives where so many have borrowed in dollars to save interest. This is the real clash between domestic vs. international and the consequence of the dollar being a reserve currency.

My advice to the Fed: YES, raise the lending rate, but do not raise the excessive reserve rate you pay banks. Alternatively, you can lower the excessive reserve rate to zero and leave the lending rate unchanged. This will have the desired impact of forcing the banks to get real.

If the Fed raises the rate, which includes the deposit rate on excess reserves, the banks will only deposit more money and not lend. This would encourage hoarding and further the deflationary cycle.