Floored US Interest Rate Policy

Forex Market Studies 

So the Fed cannot raise US rates; what next?

Former Pimco Head Mohamed A. El-Erian just about sums up these last 7 years of Neo-Keynesian interest-rate meddling: "The first is that a decision to raise rates at the conclusion of the Open Market Committee meeting Thursday would be the first such increase in almost 10 years. That would signal the beginning of the journey out of a prolonged period of floored policy rates that has lasted much longer than anticipated by almost everyone, including Fed officials (past and present)". For the full article please read here as follows:

http://www.bloombergview.com/articles/2015-09-16/cutting-through-the-rate-hike-hype

Central banks exist to police the banking market and to protect the value of a nations currency during the course of steering the nation along the path of economic growth with minimal  inflationary pressure. Post 2008 the US Fed engaged in a two-fold plan to save the US economy: 1. quantitative easing through money market operations to purchase back US Treasuries to place more liquidity into the the money markets and 2. lowering the official interest rates benchmark in succession to assist the credit markets in helping Wall street and Main street find a path back towards economic growth. Under normal circumstances within the framework of the 5-7 year economic cycles from peak to trough, as experienced since the birth of the modern global economic order post WWII, The US economy should have engineered a successful impetus to spur on a stuttering economy into a low-inflationary period of growth. However, the sheer scale of the credit bubble that grew from 2000 - 2007, with the US banking sector and financial services industry largely to blame, brought in the hand of the Federal government with the arrival of the new Obama administration to force intervention in the entire system of risk-allocation and valuation of capital; which should always remain within the domain of the free market enterprise.

Classical Laissez faire economics as championed by the Reagan administration in the 1980's called for the minimum government involvement in the US economy. But where under the Bush administration Bear Stearns and Lehman Brothers were allowed to capitulate to allow for the efficiency of free markets to re-allocate capital with unhindered risk investor assessment; the new administration recognized that it could not stand by to watch the troubles of the insurance and auto industries in 2008. Certain companies were deemed to large to collapse and therefore government intervention was warranted. This action placed additional constraints upon the Federal budget true enough; but worse; it resulted in the distortion of interest rate policy for which today the US economy stands in complete disequilibrium from economic reality. Today, markets have become so disjointed as a result of Big Government intervention in the US economy and the intervention in the entire system of risk allocation in the US equities and fixed income markets. 

Referring back to the article of Former Pimco Head Mohamed A. El-Erian writes "And the prospect of an increase certainly shouldn't produce dire warnings about another "Lehman moment" that would lead to global economic and financial calamity". The trouble is that the Fed has lost much of it's independent clout to serve the political will of government and in therefore serving, listens with keen interest to the acute calls of distress when Fortune 500 CEO's clamor about the cost of credit. The loss of the modern American version of 'Laissez faire', which behooves good governments to refrain from intervention in business affairs, is the reason why today the US Fed cannot move beyond zero percent interest rates even after 7 years of defending businesses too large to fail. One would have considered that the sharp, brief pain of loss eased over by flight of capital to good investments, would have been a better standard of measure that the government trying to assert a positive market value for failed business assets.

For an understanding of interest rate theory please download for free the following book at Bookboon: 



http://bookboon.com/en/interest-rates-an-introduction-ebook

 

The book will amply restore the readers guidance in understanding how markets should price risk through interest rates and how the central bank should work with markets hand in hand rather than to stand aloof and officiate in such a disjuncture that today US credit market traders say one thing and the Fed says another. 

Yours sincerely

Pieter Bergli - DeLoren Trust Holdings

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