Last week as I sat waiting for yet another statement release from a small, unelected group of people who exert incredible influence over the financial markets, there was one thing I wanted to say to them:
Please stop helping us!
If I could send them a note, it would read like this:
The best arbitrator of interest rates and the price of money is the free market. Not you.
Your assistance, while well-intentioned, is merely mucking up the works and distorting prices.
Your actions are killing responsible savers, while rewarding marginal buyers with cheap funds.
You might be trying to help, but your efforts only complicate matters further.
There is precedence in the Fed’s own history for closing down an interventionist policy, and it didn’t cause the end of the world as we know it. To find it, all you have to do is search the term: “Treasury Federal Reserve Accord, 1951.”
In the mid-1930s, President Roosevelt had a problem. Upon entering office he initiated massive federal spending programs, trying to spark inflation and motivate people to spend.
Only, it didn’t work out very well. Inflation came, as higher prices and interest rates showed, but the economy didn’t recover as anticipated.
That put Roosevelt in a pickle. He needed to keep selling U.S. Treasury bonds to finance his programs, but rising interest rates were scaring away buyers. So, he enlisted the help of the Federal Reserve.
To ease concerns about falling bond values as interest rates rose, the Fed agreed to buy any long U.S. Treasury bond at a yield of 2.5%. This allowed the government to sell any amount of bonds they wanted — and investors to buy them — without fear of the bonds suffering a loss due to higher rates.
If inflation rose above 2.5%, investors could just sell their bonds to the Fed. If inflation fell below 2.5%, then investors made money. It was a win-win! Sort of. There’s always a downside.
