A meme went around the office yesterday, shortly after the Fed meeting…
Really, that says it all.
Joking aside, the time for central bank tinkering has finally coming to an end!
Zero interest rates, negative interest rates, bond-buying, money-printing and other forms of Ludacris experiments to devalue currencies have ALL failed at growing economies, inflating prices and creating jobs.
Sure, it’s been easier for companies to borrow money to buy back their own stock, which inflates financial asset prices, but that hasn’t translated into higher corporate revenues, profits or investments.
The Bank of Japan (BoJ) shocked the markets in January when they adopted negative interest rates. I saw the move as sheer desperation, which back-fired on them. The BoJ was hoping for a weaker yen but saw it strengthen, despite their best efforts. And Japanese bonds have seen a recent selloff. Their 10-year bond was yielding -0.10%. It moved up to a -0.05% yield.
As is normal for central bankers everywhere, if a plan doesn’t work, just do more of it. According to Prime Minister Shinzo Abe, the benefits of negative interest rates include encouraging corporate debt issuance and lowering mortgage rates, along with fighting deflation.
But their negative rates aren’t flowing down to consumers and commercial banks are taking a hit in their earnings.
But who cares?
Government borrowing costs are lower.
Yesterday, the markets were looking for more stimulus in the form of deeper negative interest rates, or more bond-buying or quantitative easing. Instead, the BoJ disappointed the markets by trying to control the yield curve… basically printing the same amount of yen but keeping the 10-year bond at around the same yield while buying shorter maturities and longer maturities.
My guess is that the BoJ had to do something or the financial markets would have punished them again by strengthening the yen, so they decided to keep current stimulus as is, with a twist.
Japan’s stock market moved higher, but so did their currency, which is not what they wanted to happen. We’ll have to keep an eye on this for a while, but so far, it looks like they failed again.
Later, the Fed, to no one’s surprise, announced no change to the interest rate policy. The federal funds rate stays at 0.25-0.50% for another two months, at least. They went on to say that the case to increase rates strengthened but, for the time being, they’ll wait to see further progress on the inflation front and the economic outlook.
(Interestingly, the Fed meets a few days before the November election, but there is practically zero chance of a rate hike at that meeting, so all eyes are focused on December.)
That said, there is growing dissent amongst the Federal Open Market Committee (FOMC) voters.
No one on the Board of Governors (political appointees) voted for a hike, but three of the five Regional Bank presidents did. Seems to me that not hiking now is more a political move than not.
Actually, Fed Chair Janet Yellen responded to a question specifically about an accusation by a presidential candidate that rates have been kept low to appease the current administration. She said that the Fed doesn’t discuss or take into account politics when making monetary policy decisions… that Congress set up the Bank as an independent agency.
Regardless, I’ve been saying for a long time (as has Harry) that eventually central banks would run out of tools to continue their experiments. So far, everything they’ve tried has failed to inflate prices and especially grow their economies. Japan has been the most desperate – willing to experiment with radical measures that have so far failed.
The Fed hasn’t done anything since last December except talk a lot about being dependent on the data. They’ve talked all year about possibly hiking rates multiple times. Numerous Fed officials have spoken about their opinions as to whether rates should go higher or not in an effort to keep the markets guessing.
For the better part of the year, we’ve seen a lot of talk and no action, little inflation, puny wage growth and stunted economic growth.
The big question that looms is: what will central banks do in the next crisis, since nothing they’ve done so far has worked?
We know one thing for certain: they’ll definitely spew a lot more hot air.
Editor, Treasury Profits Accelerator
P.S. Tomorrow, John Del Vecchio, our resident Forensic Account, is going to tell you about an interest rate that could have a far greater impact on you and your wealth than the fed funds rate. Watch your inbox tomorrow around 4 p.m. for his email.