Why the Federal Reserve cannot raise interest rates. (An inconvenient truth)

The last couple of years the Federal Reserve has been talking about raising rates and talking about the so called US economic recovery. Of course in reality the recovery has been anemic at best and the fact the fed funds rate has only increased a paltry 25 basis points.

So if everything is so great in the economy and the unemployment rate is so low why don't they just go ahead and raise interest rates. The truth is they cannot raise rates without causing a huge recession and blowing up the deficit, here is the proof.

You will notice on the chart the GDP stopped growing right around the time the Federal Reserve raised rates back in December of 2015 by 25 basis points. It was likely starting to slow before the rate hike, by keeping rates this low for so long reduced the effectiveness in terms of stimulating the economy. The U.S. economy is barely growing despite highly accommodative monetary policy from the Fed.

Chart number 2 shows the growth of debt accelerating especially after 2001 this was at a time when Alan Greenspan the Federal Reserve chairman starting playing around with low interest rates trying to spur the economy. Of course Ben Bernanke and Janet Yellen have doubled down and continued this radical monetary policy approach by keep rates at historically low levels. The low interest rates have fueled the largest debt bubble in history and it is only a matter of time when it will burst.

This is the interest expense on the debt, you will notice the amount of interest is starting to increase each year because the debt pile is growing. Not showing on the chart is 2016 which is expected to come in at $457 billion almost half a trillion dollars in interest alone. You can imagine if interest rates were normalized what the interest expense would be.

The last chart the interest rate on the 10 year treasury the actual mean on this note is 4.59% compared to the 1.55% we see today. If rates were to be normalized the yield on the 10 year would be about 3 times higher therefore interest expense would be 3 times higher as well. Essentially the interest expense would be about $1.4 trillion, when that happens the debt would explode higher and the government would have no choice but to cut spending drastically or raising taxes or both. Either way this will crash the economy, hence why the Federal Reserve cannot raise interest rates.

Despite the doom and gloom the fed does need to normalize interest rates in order to undue all the damage they have done over the years with their monetary experiment gone bad. It will bring about a great deal of economic pain however this needs to happen so the free market economy can fix all the mistakes of the Federal Reserve and the government mismanagement that has occurred over the years.