Is This Why Interest Rates Are Falling and the Global Economy Slowing?

Money For the Rest of Us

J. David Stein

Investing, Investing Podcast, Business, Economics, Economy

4.5 • 1.4K Ratings

🗓️ 17 July 2019

⏱️ 29 minutes

🔗️ Recording | iTunes | RSS

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Summary

Has the off-shore dollar market in terms of dollar financing and currency hedging gotten so big that it can dictate Federal Reserve monetary policy including the expected short-term interest rate cut by the Fed at its July 2019 open market committee meeting? In other words, has the Federal Reserve lost its ability to conduct monetary policy and control interest rates as it sees fit and is now in search of other tools?

In this episode you’ll learn:

Why the Federal Reserve is puzzled by how U.S. interest rates are behaving.
How the large but opaque off-shore dollar lending and currency hedging market could be strengthening the dollar, slowing the global economy and pushing down interest rates.
What is leading to a global dollar shortage.
Why the Federal Reserve is researching other policy tools.
What investors can do to protect against uncertainty regarding the dollar

Thanks to ButcherBox and Policygenius for sponsoring the episode.

For show notes and more information on this episode click here.

[0:20] The suspected outcome of the Federal Reserve Committee Meeting on July 30th and 31st.
[3:04] Is the Federal Reserve’s inconsistency, in this case, something to fear?
[6:31] The influence of offshore U.S. dollars on the Federal Reserve.
[9:10] The issue of undocumented offshore dollar-denominated debt.
[12:06] The ramifications of the inability of the global supply chain to access the dollars they need.
[15:21] Banks are less willing to lend dollars while also demanding more “pristine” collateral.
[18:36] The complexity of the global U.S. dollar matrix.
[21:06] Steps to take to cushion your portfolio against any ramifications of a lower Federal Reserve interest rate.

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Transcript

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0:00.0	Welcome to Money for the rest of us. This is a personal finance show on money, how it works, how to invest it and how to live without worrying about it.
0:10.0	I'm your host David Stein today's episode 260. It's titled,
0:14.4	Is this the reason interest rates are falling and the global economy is slowing?
0:20.0	The day that this episode is released, the Federal Reserve Open Market Committee is meeting.
0:28.0	And all indications is they will cut their policy rate, the federal funds target rate, as well as the interest
0:37.5	rate that the Federal Reserve pays on the reserves that banks hold at the Central Bank.
0:45.0	The Federal Reserve has been on a process of raising its policy rate.
0:50.0	It was close to zero back in 2015. Now it's at 2.5% and they're suggesting
0:57.6	it could be an insurance cut to help the economy, the global economy which appears to be slowing, partially due to trade,
1:07.0	but more importantly and potentially due to an even more serious concern that I talked about way back in episode 134, it was a global dollar
1:20.4	shortage. In that episode, I quoted Isabella Cominska. She writes for the Financial Times
1:28.2	Alphaville blog. She said global dollar shortage stands to become the most significant destabilizing force in recent times and the most unanticipated global tail risk.
1:44.0	Now that seems like kind of an arcane topic in it.
1:47.0	It's somewhat complex, but it's important because something happened in May that has not happened before.
1:55.8	The Federal Reserve pays interest on these reserves that banks have, and generally speaking, they have set that interest rate above what's known as the
2:08.0	effective Fed funds rate and so banks were getting this interest the Fed funds rate is the rate that banks charge each other to lend overnight.
2:18.0	Because they had so many reserves, often that wasn't necessary.
2:22.0	In an orderly, Often that wasn't necessary.
2:23.0	In an orderly monetary regime, the Federal Reserve sets the rates at once.
2:30.0	It has a target for the effective funds rate, and it has a target for the effective funds rate and has a target for the interest rate on these excess reserves.
2:38.0	And its desire was that the rate on the excess reserves would be higher than that effective funds rate.
2:48.0	Except beginning in March and continuing today the federal funds rate is yielding it's higher than that rate on
	...

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