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Thursday, July 29, 2021

“Hey Boneheads Cut the Interests Rates to Zero”

In a series of Tweets early Wednesday, President Trump wrote that “boneheads” at the Fed should lower interest rates to Zero or below so that the US could decrease its borrowing costs.

As a property developer, President Trump is thinking about negative rates from the perspective of a borrower.

But, the Fed’s lukewarm appetite for negative rates is partly because officials know that it could cause outrage among savers and pull the central bank into a political storm.

As yields on safe-haven government debt collapse globally because of fears over the economy and expected central bank easing borrowing costs have dropped sharply.

In fact, the Congressional Budget Office said last month that the federal government’s savings on borrowing costs translated into a $1.1 trillion net reduction in the CBO’s projections over the following 10 years, even as deficit spending surges.

With inflation low, The European Central Bank, Swiss National Bank and the Bank of Japan have all committed to keeping rates negative — a policy President Trump feels the Fed should replicate domestically.

Some experts believe negative rates serve a function, at least in the short term.

Krishna Memani, Invesco’s vice chairman of investments, wrote last week that the “goal of the central bank at the end of the day is to focus on growth and employment, and not to ensure that enough high yielding assets exist in the economy to meet some threshold of claims.

The emphasis on higher yields “is a moot point as asset returns cannot be generated without underlying economic growth,” Memani said. That argument dovetails with President Trump’s emphasis on the Fed needing to do more to bolster growth.

“If you frame the argument along these lines, you can see why in a low demand environment that low and even negative yields may be needed to support growth. There is nothing magically different about negative nominal yields,” Memani added.

The yield on the benchmark US 10-yr T-Note is hanging near record lows below 2%, and is expected to fall further in here.

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