Zero Interest Rate Policy
Recently, there has been a global movement toward eliminating cash, Ron Rimkus, CFA, observes. It sounds strange, almost bizarre. Who exactly wants to eliminate cash? Why? What would we do without it? Rimkus explores these questions as well as the most critical one of all: Is it good for his mom?
It has been nearly a decade since the US Federal Reserve last raised its Fed Funds rate, which may help to explain the apprehension among financial market participants who wonder how markets will react when the Fed finally decides to move its benchmark rate up from the current 0% to 0.25% range. Earlier this week, we asked CFA Institute Financial NewsBrief readers when they expect the Fed to hike interest rates. Not surprisingly, opinions were divided.
Today, the Fed voted to forgo a rate hike, keeping short-term lending rates near zero. Now that the question of what the would Fed do has been answered, we now turn to why.
While it is true that the government interventions of the past few years indeed avoided a massive debt deflation cycle, it is also true the these interventions themselves are changing the fundamental structure of the economy, as well as the expectations of its participants.
David Kelly, CFA, chief global strategist at J.P. Morgan Funds, outlines three problems with the current Federal Reserve policy of zero interest rates and quantitative easing.
Campbell Harvey discusses the limitations of quantitative easing in today’s macroeconomic environment. His analysis has implications for the role of commodities, specifically gold, in a diversified portfolio.
Operation twist is scheduled to end, and the Fed seems intent on replacing it with a program of buying longer-term U.S. Treasuries. Now more than ever, there seems to be a dramatic divergence between the paths of monetary and fiscal policies.
Bond market maven James Grant gives a “cook’s tour” of the “reigning errors and foibles” that are being made in today’s bond markets and that have led us astray in committing capital.
The slightest rise in rates here in the US could devastate federal, state, and municipal budgets nationwide. All of which goes a long way to explaining the Fed’s brute determination to keep interest rates miniscule.