1st US rate cut in a decade.

On 31 July 2018 the US Fed cut interest rates for the first time in a decade. Federal Reserve Chairman Jerome Powell said the first interest rate cut since the financial crisis was to “insure against downside risks.” The rate cut was a quarter basis points.

This year the Fed's interest rate expectations have changed from a steady tightening path to a holding pattern and now with this interest rate cut decision more cuts are expected before the year ends. Indeed the US interest rate futures have priced in three rate cuts this year - in July, September and December.

A lot of confounding signals are beneath the Fed's decision. The Fed's Independence recently has been under a lot of spotlight because of the political pressure from the Trump adminstration to cut rates. The Independence of the Fed has been the corner stone of the recent mainstream monetary economic thinking. The former Fed Chairs of the Board of Governor's including the likes of Bernanke, Yellen, Greenspan and Volker have penned an opinion piece in the Wall Street Journal articulating the importance of maintaining the Independence of the Fed. The Independence interpreted as the absence of political interference in the operation of monetary policy.

Normally an interest rate cut is initiated to stimulate a slackening economic environment. With the lowest US unemployment in 50 years and Wall Street at a record high, one wouldn't expect a rate cut at this stage but a counter argument can be made when considering some forward-looking economic indicators of the US which have recently dipped indicating that maybe a recession is imminent now than ever. In some OECD countries such as Germany, the GDP growth is now approaching the negative territory signally that a downturn is catching up on the industrially developed countries. The interest rate yield curve inversion is also indicating that a recession is imminent. An inverted yield curve means that investors expect interest rates to fall, which typically happens in an economic downturn. It usually tends to take some time for example 12 to 18 months.  Therefore the downside risks to future growth rather than the economy being already weak as indicated above influenced the Fed's decision.

An interest rate cut will raise the prices of various financial assets. This impact is noticeable especially when there is a policy transmission channel which impacts on the pricing of these assets. Therefore it is important for there to be a convergence between policy rates and the market rates. The US government can use the occurrence of low interest rates to raise cheap debt as they would be able to lock in these rates into the debt. The impact of the Fed decision on emerging countries and Africa could be long term investment portfolio reallocation in most cases to their detriment together with cutbacks in grants and aid in anticipation of a recession. It's been over a decade since the last global recession. On average recessions occur roughly after every 7 years hence this cycle post the last recession has been comparatively longer. This line of thinking assumes that the phenomena of boom and bust is still in existence.

The severity of the last Great Recession should inspire policy makers the world over to answer the question of whether lessons learnt of that crisis have been incorporated in how they manage macroeconomic cycles. It is important that macroeconomic policy making is not riddled with the politics and intellectual flaws of yester years.

Debt deleveraging etc

Check out this interesting article

Negative Interest Rates

The idea of negative interest rates might appear absurd at first but in is a common concept in my opinion. The absurdity stems from the way the idea (negative interest rate) is framed in our minds (especially at first instance).

The statement negative interest rates (NIR Hereinafter) when applied to mmo means that you actually pay the central bank money when you lend it money (normally they pay you money for such a situation). At first instance one might ask oneself why an institution might accept such a situation (the thinking in our minds is that such a situation is bad). Whether NIR are good or bad depends on the economic situation at hand. Before I describe when NIR are good or bad, I am going to reveal common situations in which we experience NIR.

Interest (I Hereinafter) is a cost paid for the use of capital. Normally the owner of the capital is paid the interest when another party uses his capital. We must not restrict ourselves to the above scenarios. First, lets agree interest is a cost! At times another scenario emerges, where the owner of the capital pays costs to another party for a service offered in relation to their use of the owner's capital. For example if you release money to someone for safekeeping purposes, you pay a cost to the other party. Well such a cost is also interest but the interest is just being paid out in the opposite direction (from owner to the other party). Hence, if interest is paid by the other party to the owner of the capital, the reverse situation (interest paid by the owner of the capital to the other party) means that the other party is paying out negative interest (NI Hereinafter) to the owner of the capital.

The Global Economic and Financial Uncertainty

A lot financial and economic events have happened these past weeks which are significant such as the the increasing fragility of the Chinese economy, the massive global stock market selling and resultant rebound of the respective indices among others

A lot remains unexplained but we can only postulate about the events. What I can say is that the global financial and economic system is still vulnerable post 2008 Financial Crisis and Global Recession. Are the reforms instituted enough? I think its a big NO!!! Why so? The dominant economic thinking has not changed much and fairly speaking the reforms are not effective. What is evident is that the dominant economic thought of the last decade and a half has failed. Not much emphasis is upon the unknown unkowns. We tend to assume that what we don't know we know as non-existent, instead of trying to model such variables.

The causes and implications of the Chinese slowdown and global stock market volatilities is something I will touch upon in a future post. What is evident is that something is not right in our global economy!

The ECB cuts its interest rate

Yesterday the ECB cut its interest rates from 0.75% to 0.50%. It’s the first cut by the ECB in as many months and it is quite interesting because Germany has all along been opposed to any further expansionary policies be it monetary or fiscal and this latest move by the ECB means that the majority of the Eurozone members are finally making bold steps to get their economies on the right footing.

There is something which I find quite puzzling about European policy-makers. They are pushing for monetary expansionary policies and fiscal austerity at the same time. What this implies is that the financial services industry gets help from the authorities to recover from the Great Recession/Lesser Depression by getting cheap loans and having their semi-toxic financial assets purchased for by the authorities at a good price considering that they are basically worthless given how illiquid, the market is currently.

On the other hand, the workers and general public who depend on government services suffer because of the austerity policies being put into effect. It’s hypocritical and the Europeans are ignoring empirical evidence which suggests that fiscal expansion should take a more prominent role in the efforts to get Europe out of the slump it is finding itself in.