After eight years of focusing on Yellen and short term interest rates, it may be hard for some in the financial business to remember that it is only in recent years that the Fed has assumed a larger role in economic policy making and thereby has become an influential factor in securities markets and price making. In the past, free markets always set both long and short interest rates, with the Fed merely reacting in an attempt to keep financial markets stable. The Fed’s dual mandate to seek to maximize employment and facilitate economic growth was always reactive rather than pro-active and properly so.
Market commentators and writers continue to highlight the Fed, as a matter of habit that is now becoming a distraction, and so many still expect economic policy leadership from the central bank of the U.S. However, a new era is now underway that is quickly and rightly once again making the Fed an independent monetary policy arm rather than a supporter of policies of political leaders who either chose or failed to do so.
It would be best now for investment professionals to put all this in a new perspective, or to at least try, as monetary policies begin to follow rather than lead free market influences. Higher rates are coming, as they most certainly should, if increased investment and faster GDP growth take hold. Monetary policies that actually foster price increases (inflation) as a matter of official policy are inconsistent with any known responsible economic theories. That approach should cease, and probably will, if actual increases in production more closely mirror normal market, consumer and business demands.
Depreciating a sovereign nation’s currency started within nations that had matured and, as a matter of social policy, restricted population increases. Even though America is increasingly socialistic as a matter of aging, it is in no way mature or stagnant economically. A huge, and the major, difference between the U.S. and its currency and other older societies is that the vast wealth of the nation is held and owned by its citizens personally rather than by central government or agencies operated or controlled by that government.
