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“Lower Rates Aren’t Working”

September 20, 2019 By Jeremy Jones, CFA

Chair Powell presents the Monetary Policy Report to the Senate Committee on Banking, Housing, and Urban Affairs. February 26, 2019. Photo courtesy of the Federal Reserve.

At MarketWatch, Peter Morici says it’s crazy for Fed Chairman Jerome Powell and ECB President Mario Draghi to consider taking rates negative, or further negative, as it’s clear that lower rates aren’t working. Morici writes:

If the definition of insanity is to do the same thing over and over and expect a different result, then outgoing European Central Bank President Mario Draghi and Federal Reserve Chairman Jerome Powell, judged by their recent decisions to further ease monetary policy, may be going bats.

However, the real prize should go to President Donald Trump.

Both central bankers are chasing the wrong target — 2% inflation — with interest-rate policies that have demonstrated little effectiveness for at least the last decade.

The 2% inflation target was chosen as a compromise for the tradeoff between inflation and unemployment but that relationship is inherently unstable. Since the financial crisis, inflation has fluctuated mostly below 2% in the United States whether the unemployment rate was 10% or less than 4%, whether the Fed pursued easy money or tightened.

Since 2014, European policy rates below 0% — central banks charging banks for deposits that they must keep at the ECB and other central bank s— have ushered in ultra-cheap loans for businesses. And governments can sell bonds that charge investors for the privilege of lending them money, but those have done little to boost European growth.

Terrible in the long run

Negative interest rates can have a quick short-term positive effect — force banks to make some worthy loans in times of business crisis — but continuing those long term is a terrible idea.

Read more here.

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Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. was ranked #5 in CNBC's 2021 Financial Advisor Top 100. Jeremy is also a contributing editor of youngresearch.com.
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