The Federal Reserve keeps talking about raising interest rates until it gets them back to more normal interest. Right now the official Fed funds rate is .5%.  I think we are to a point where the Federal Reserve is backed into a corner.

The Fed funds rate cannot be lowered too much more before it becomes negative. Negative rates were thought to be impossible until recently when several countries issued negative rate bonds. Unbelievably, the bonds actually sold! Now there is actually approximately 15 trillion in negative interest rate bonds out there.

So, the Federal Reserve can only lower interest rates for  a little bit in order to stimulate the economy.  Even with rates at record lows, the economy is not doing all that great. Corporate profits have been dropping for over a year now. Work force participation has gone down in the last ten years while incomes adjusted for inflation have been stagnant.

This during a period when debt has gone up dramatically. National debt has doubled in the last ten years while personal debt is starting to rise also. This shows me that just holding the economy where it is at takes an incredible amount of debt.

A logical reason why lowering the interest rate does not stimulate the economy as much as hoped is that a lot of people are saving for retirement. With a decent interest rate, people don’t need to save as much as they do when the interest rates are at record lows. So now, many people are saving even more instead of spending more money.

The Federal Reserve doesn’t have very far to go in lowering interest rates until they are backed into a corner and are out of bullets. On the other hand, there are multiple problems with raising interest rates also.

If the Federal Reserve raise rates, the US government will have a big problem! With the current national debt load, if rates went back up to 5%, the US government would be paying almost a trillion dollars a year in interest. This is over a third of all of the money they bring in!

Also, corporations would struggle even more to make a profit and more corporations would default on their loans. Families would struggle with more debt and the economy would probably slow down even more than it is.

So overall, the Federal Reserve is backed into a corner. They can’t lower interest rates much, but they can’t raise them much either. I think they are just about out of bullets and may ultimately lose control over interest rates all together.