Keeping the Interest in Interest Rates

We have been critical of the government’s heavy-handedness and zero interest rate policy (“ZIRP”) over the last few years, worried that it was artificially propping up an economy that needed to establish itself and find its own equilibrium. It can be analogized as a youngster learning to ride a bike with training wheels, but the wheels are kept on too long and after seven years of well-intentioned help, you have a teenager who can’t balance on their own and must start from the beginning all over again.

If the US economy is to recover and thrive, it must be able to operate unfettered, as it had through over a century of the greatest economic growth the planet has ever seen. This will in turn stimulate the global economy and help other individual countries, which will come back to further help the US in a virtuous circle. That the Federal Reserve does not have enough faith in the current economy to begin loosening the training wheels by raising interest rates a mere quarter of a percent is worrisome indeed.

Keeping interest rates artificially low has helped to temporarily prop up domestic stocks, but this caused prices to climb too high.

This is also detrimental to foreign economies, especially those which are commodity dependent (Australia, Brazil, and Canada for example). A stronger dollar causes commodities, which are priced in dollars, to drop in price. The dollar is stronger so fewer are required for payment. This decreases revenue and thus the host country’s supply of dollars, so it has fewer to spend on the world market, and fewer to help the global economy.

Declining values of currency are also equity killers for international investors. A weak currency being converted into dollars can actually turn a stock with positive returns negative.

The opposite is true for a weakening dollar. After a long period of a strengthening, the dollar is more likely than not to weaken going forward, particularly when the Fed finally raises rates, which is a “when” not “if.