This morning Mark Carney pulled the trigger, and announced a change in trajectory for the target overnight rate… moving it up to 0.50%…. up a quarter of a percent from where it’s been since April 21st, 2009, when it was set at 0.25%. This was actually the first rise in the rate since well before the financial crisis, going all the way back to July 10th, 2007, when it was raised from 4.25% to 4.50%… and it’s been all downhill from there, until today.
There has been a lot of ink spilled recently about this increase, but as we can see from the historical data, 0.50% is still obscenely low. Even compared to the 2.00% that was thought to be rock bottom back in 2002 and 2004 (levels not seen since the post-WWII period). A lot of people seem to think our “recovery” may be too fragile to handle an increase in the overnight rate… but, frankly, if the economy can’t handle this, this isn’t a recovery. Hell, if it can’t handle 2.00% this isn’t a recovery.
Regardless, this should be merely the first of many announcements of ratcheting up the overnight rate to come over the next couple years. If we’re ever going to legitimately recover, the economy is going to have to handle the rate returning to historical norms. How quickly it happens is yet to be seen, nor has the long-term side effects of the policy of slashing rates to the bone… the latter I suspect will not be pleasant. The answer to a credit bubble is not another credit bubble… that merely kicks the can down the road, and more often than not makes it much worse.
P.S. If you’re looking for a little something to get you through your workday, here is an interview with Danielle Park, where she offers lots of sage advice about how to handle your investments going forward, appropriately enough titled, Avoid Extremes.
