By Douglas R Terry, CFA
The Federal Reserve left interest rates at 0 after their 2 day policy meeting this week. Less concerning, they lowered the forecast for future rates.
We have red and green street lights. Why? Because society finds it beneficial that people using our streets aren’t speeding through an intersection from both directions at the same time. We have laws against stealing. Why? Because we find it beneficial to our society that people in our country can’t arbitrarily take or use or hard earned possessions. Rules and laws in society exist for the betterment of the whole.
Why do certain bankers think that it is beneficial to have interest rates at 0%, at least for the primary players in the financial industry? The interest rate is a cost of money for the society’s economy. Why do we want the hurdle rate set at 0? Don’t we want minimal requirement higher than nothing for the use of our money?
We wouldn’t want the hurdle rate in the economy to be 0. Having no cost to money is the economic equivalent of no intelligent laws in society. The equivalent of using our money but having a baseline of zero for the benefit produced with that money. The results are what you would expect, the wild west, One might say, Financial Anarchy.
Do we live in a world where people many times worry more about the volatility in markets than their day to day job. Is this a world where retired citizens now fear their income is not enough to live out their life? Are we in a world where workers, saving for retirement, must worry about the magnitude of the next market crash? Are these not the result of a world without proper laws and enforcement of such laws.
Rules and laws exist so that the whole enjoys a better quality of life. They exist so that incentives align with morality and the social laws defined by human nature. We should want and expect better from the trustees of our currency. We can do better!