FX MONETARY POLICIES
Japan is actually doing it, without triggering inf lation. As noted by fund manager Eric Lonergan in a February 2017 article, “The Bank of Japan is in the process of owning most of the outstanding g o v er n men t debt of Japan (it currently owns around 40%).” Forty percent of the US national debt would be $8 trillion, three times the
amount
of federal securities the Fed holds now as a result of q u a n ti ta ti v e easing.
Yet
the Bank of Japan, which is actually trying to
generate
some inf lation, cannot get the CPI above 0.2 percent.
the economy? We see at least two reasons. First, the Fed needs to raise rates so that it has room to lower them when the next recession occurs. And second, by acting early, the Fed
growth, the result has been to trigger a recession. So why raise them? As observed in a June 2 editorial in The Financial Times titled “The Needless Urge for Higher B o r r o w i n g Costs”:
In this context, the apparent dete rmination of the Fed in particular
to
press on with interest rises
looks
rate a
In his presidential campaign, Donald
Trump attacked Janet Yellen personally for keeping rates low, putting her career in jeopardy
likely hopes to choke off inflationary pressure before it starts to build.
The Hazards of Operating on the Wrong Model
The Deloitte report asks:
Since the anticipated impact of higher interest rates is slower growth, the question becomes: why would the Fed purposely act to slow
28 FX TRADER MAGAZINE July - September 2017
Rates need to be raised so that the recession this policy will trigger can be corrected by lowering them again – really? And what inflation? Te Consumer Price Index has not even hit the Fed’s 2% target rate. Historically, when interest rates have been raised in periods of tepid
little peculiar. Having created e x pe c t a ti o n s that it was likely to tighten policy with three quar t e r -p o int increases over the course of 2017, the Fed is acting more like a party to a contract that feels the need to honour its terms,
than a central bank that takes the data as it finds them. [Emphasis added.]
In the six months since President Trump was elected, the Fed has pressed on with two rate hikes and is proceeding with a third, evidently just
because it said it would.
Impatient bond investors are complaining that it has found one
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