Noah denkt™ - The Power of Balanced Reasoning
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The Federal Reserve’s rate hike dance
Dialogue with the Alter Ego on the cautious Federal Reserve rate decision of Sep. 17, first drafted on Sept. 23,
published on Sept. 24, 2015
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Question by Alter Ego of Noah denkt™ (AE): In a closely watched session on Sept. 17, the US Federal Reserve
decided to leave interest rates unchanged.  It justified its decision by invoking possible deflationary pressures
that might arise from the economic slowdown in China, the related turbulences in currency markets and the
contagion risk in financial and emerging markets. Noah denkt™ has
earlier on presented ambivalent views
about the likelihood of rate hike in September. And this project had also echoed Paul Singer’s damning 2014
remarks about
faked inflation and faked unemployment numbers. How does Noah denkt™ consequently
respond to the Fed’s holding decision now that it is actually on the table?

Answer by Noah denkt™ (Nd): Well, Noah denkt™ was still in Silicon Valley when the Fed decided to leave
rates unchanged. And the one thing we can unambiguously say about the price level in the greater Bay Area is
that it doesn't feel at all there as if inflation were still below 2%. In fact, it isn’t.  
According to the Bureau of Labor
Statistics, the core inflation (all items excluding food and energy) in the Western Region of the US was at 2,4 %
in August 2015. And that of services less energy services was even at 3.3%. - Now the Western Region
comprises all of California and includes among others states like Alaska, Idaho, Montana, Nevada and
Wyoming. So you can imagine what the true inflation rate in San Francisco, Palo Alto or San Jose is. In two
words, it is “outright scary.” Obviously, we are well aware that the Bay Area is very much a case of its own. One
can clearly describe it without hesitation as the world’s preeminent future lab. So some meaningful surcharge to
the prices elsewhere is absolutely justified.  But this present surcharge can be felt even beyond the traditional
confines of Silicon Valley from Healdsburg and Calistoga up North, to Sacramento in the East and to Monterey
County further south. So it is hard to deny that some bubble is in the making here.

AE: In other words, you believe that it was a mistake not to raise interest rates?

Nd: We believe so. The sad truth, however, also is that the world economy is so distorted by money printing
virtually everywhere in the world that the poor souls on the Federal Open Market Committee have an
impossible job to do. After all, it can’t be denied that we are all dancing now on the rim of a potentially very
active volcano.

AE: How much of a rate hike would you have favored?

Nd: Well, we probably would have opted for a small, homeopathic rate hike just to test the water and to get
done with the market’s paranoid fixation on that first upward move.

AE: So you do in fact think that the US economic recovery is sustainable. Why then do you keep hinting at the
structural fragility of the world market? Does it really make sense to favor a rate hike when you basically
presume that the devastating effects of the financial 2008 bubble still aren’t overcome?

Nd: Good point. But on the road back to sanity and to a new normal one may well have to embark on
contradictory steps. Clearly, it is impossible to reach a new sustainable balance without having flickered in the
face of some inevitable, yes even serious, pain. In other words, it seems more reasonable to us to slowly
reduce the amount of Keynesian distortion even at the price of possible adverse consequences than to
continue then down the path of largely artificial growth.
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Keywords:

2015 inflation data for the Western Region of the US, inflation numbers in Silicon
Valley, 2015 inflation data for the San Francisco Bay Area, rate hike of the
Federal Reserve 2015 or 2016, fixation on the Federal Reserve's rate decision,
real inflation numbers in California