Waiting for Godot is a play written by the Irish novelist Samuel B. Beckett in the late 1940s in which two characters, Vladimir and Estragon, keep waiting endlessly and in vain for the coming of someone named Godot. The storyline bears some resemblance to the Federal Reserve’s talk about raising interest rates.
As the Mises Institute reports, since spring 2013, the Fed has been playing with the idea of raising rates, which it had suppressed to basically zero percent in December 2008. So far, however, it has not taken any action.
If savers and investors expect that interest rates will remain at rock bottom forever, they would presumably turn their backs on the credit market. The ensuing decline in the supply of credit would spell trouble for the fiat money system.
To prevent this from happening, the Fed must achieve two things:
First, it needs to uphold the expectation in financial markets that current low interest rates will be increased again at some point in the future. If savers and investors buy this story, they will hold onto their bank deposits, money market funds, bonds, and other fixed income products despite minuscule yields.
Second, the Fed must succeed in continuing to postpone rate hikes into the future without breaking peoples’ expectation that rates will rise at some point. It has to send out the message that rates will be increased at, say, the forthcoming FOMC meeting. But, as the meeting approaches, the Fed would have to repeat its trickery, pushing the possible date for a rate hike still further out.
If a rush for the credit market exit would set in, it would be upon the Fed to fill debtors’ funding gap in order to prevent the fiat system from collapsing. The central bank would have to monetize outstanding and newly originated debt on a grand scale, sending downward the purchasing power of the US dollar .. and with it many other fiat currencies around the world.