Why Fed's interest rate change is not effecting the economy?
Interest rates and treasury instruments are tools to change and adjust monetary policies. During a stagnant economy, the slight change(increasing interest rates) effects M1,M2, and M3. Meaning cash positions are tightened. People will not have money to buy anything. It was a drastic way to slow down the economy that will take years to pump up. The government on the other hand used military build up, even when they could not afford the deficit, to pump the economy back up. The opposite actions of the federal government and the Feds worked against each other to cause this great country to have many harms to our past economy. Business cycles bankrupt much of our microeconomy.
The new economy which is void of business cycle is based on higher standard of living(obsolescense and replacement principle invented by Alfred P. Sloan, MIT and GM). This microeconomy tune up each year since 1992; created commercial credit, which is so large that Feds have no other interest rate policy that can effect it(capitalistic principle of wealth creates wealth, cost cutting creates even more wealth). The reason is basically, interest rates are effecting only those banks who borrow at overnight discount window in NYC. Most banks have liquidity, which is invested in other instruments than Treasury instruments. Interest rate increase alone therefore will be ineffective against the returns of other instruments(such as 30 year mortgage and municipal bonds). Any responsible Feds officials will not increase interest rates higher than the mortgage and muni rates, which is suicidal.
Drastic tightening by Feds using other variables may effect the microeconomy, but why should they, committing us to suicide again? |
