Why Did the Fed Raise Interest Rates & What Were the Effects?
(TOPICS: Central Banks, Quantitative Easing (QE), pegging one currency to another, What happens when int/rates are raised)
The USD strengthened in 2015, because in December of 2014 the Federal Reserve adjusted their Quantitative Easing (QE) Plan and stopped printing money to purchase bonds. The Fed talked about raising interest rates all year until the last week of 2015, when they raised them a quarter percent. This action is called “tightening,” and it caused great turbulence in US and global markets, because so many nations have pegged their currencies to the USD and most of their debt are comprised of US loans, denominated in USDs. This action raised interest payments owed to the US, as well as caused these nations to buy more US securities and USDs to maintain their peg.
When the Feds raised interest rates .25% it strengthened the USD, but it made it more expensive for US consumers to purchase homes, cars, etc., and for businesses to expand their operations, hire more people and grow, thus slowing growth and expansion of the economy. The reason a central bank normally raises interest rates is to slow an economy that is expanding too fast and to curtail inflation. Currently, however, the US has no inflation, retail sales are down, corporate earnings are down, industrial output has shrank, shipping orders are down, the US trade deficit last month was the highest on record and US stock markets are preforming poorly. The only basis the Fed gave for “tightening” was low unemployment numbers and mediocre low paying job growth; but they completely ignored all the other economic indicators, and the fact that over 100 million people are on the under-employed list, who don’t have a job and don’t show up in the unemployment figures.
The questions this raises are: Why did the Fed ignore all the other economic indicators and raise interest rates in a weakening economy, further weakening it and causing global turmoil… and why do they plan on doing it four more times in 2016? Raising US interest rates will also increase the debt maintenance the US has to pay on the $19T of debt that renews every quarter on the 90 T-Bills and 1-Y Treasury Notes which comprise 85% or more of US debt.
Currently, the Federal Reserve is the only central bank in the world raising interest rates, even those economies which are currently preforming better than ours are not tightening rates. In fact, European Central Bank (ECB), Japanese Central Bank (BOJ) and Chinese Central Bank (PBOC) lowered their rates, while the central banks pf England, Canada, Australia, New Zealand and most others maintained their current rates.
More and more nations are continuing to de-peg from the USD, because they can’t afford to maintain the peg. This is going to reduce the use of the USD and reliance on the US in the global market place, which will not be a positive outcome for the US or the USD. Confidence in the US and Federal Reserve is beginning to erode, both times the Yuan devalued, other currencies went up more than the USD, meaning there is more faith in other currencies like the euro, British Pound and Japanese Yen. This has never happened before, but it happened twice in the last six months.
Most analysts don’t believe the Fed will raise interest rates and many think they will regret raising them, as they will probably have to lower them and begin printing money and purchasing bonds again to bolster a faltering US economy. The Fed did not raise them again at their Jan 26th meeting. Many are saying that things are lining up just as they were before the 2008 Financial Crisis. In the last seven years there has been a dramatic increase of central bank intervention and the printing and devaluing of currencies, as well as a significant increase in US debt, as well global debt. Stephen Jen, founder of London-based hedge fund SLJ Macro Partners LLP, sums it up this way, “All of these natural market forces that have been suppressed and overwhelmed by money printing by developed-market central banks will likely assert themselves this year. My guess is that this will not be a tranquil year.”