Special to USA TODAY
Published 7:06 AM EDT Sep 15, 2019
Hey Federal Reserve Board: Pay attention! Everyone fears the “inverted yield curve” – where short-term interest rates exceed long-term rates. So you contemplate cutting short-term rates. OK, but you’re ignoring bigger basics. Dump all those bonds you idiotically bought under your ill-conceived “Quantitative dis-Easing” (QE) programs. Get real.
You should worry about an inverted curve. Why? Banking’s core business has always been borrowing at short-term rates to fund long-term loans. The higher long rates are above short rates, then the more profitable future lending is. So, then, banks become more eager to lend, they loan more – and to customers who need the loans more. No spread. Fewer loans.
So, many pundits urge cutting short rates. That’s understandable! Convention claims lower prices spur demand. If you cut the price of borrowing – shouldn’t you get more of it?
But that’s demand-side thinking.
Wait, negative interest rates? Trump wants Fed to cut interest rates to zero or below. Here’s what it could mean for you.
New car prices: Why buying a new car is more expensive than ever
But price and quantity are determined by demand and supply together. In this economic cycle the supply side of monetary policy has been hugely stronger than the demand side. We already have super low rates. Everywhere! If these aren’t low enough, heaven help us. Excessively low rates are why the yield curve inverted in the first place. Not because the Fed jacked up short rates, fighting inflation, like every cycle before. But because long rates plunged globally. The 30-year U.S. bond yield is just over 2%. Japanese 15-year bonds have negative yields. All German government rates are negative.
Yet these overly cheap rates aren’t spurring massive lending anywhere. Global money supply growth has decelerated since 2012. We’ve had low-interest-rate tight money. Are central bankers bonkers? Do they really believe cutting further boosts borrowing? Are you really hot to lend your savings long term at 1%?
Cutting short rates alone isn’t adequate. It’s still low-interest-rate tight money. As Europe shows, lower than low doesn’t get it on. European negative short rates force Europe’s banks to charge savers for deposits. You wanna be Europe? Cutting further hurts, doesn’t help, creating even less lending and slower growth.
Many stupidly say cutting short-term rates reduces long rates, stimulating corporate and homebuyer borrowing. If so, loan growth should have zoomed during QE’s introduction, when the Fed forced long rates lower by buying trillions of long-term bonds. It didn’t. Lending crawled, increasing only when they tapered their bond buying.
Bonkers central bankers can’t fathom that the overall loan price, or average interest rate, is less important now than the availability and quantity of loans. Supply matters. Here and overseas, central bankers should stimulate monetary supply. They should steepen the yield curve by selling those bonds they never should have bought and letting long rates rise. Then lenders will want to lend.
And I don’t mean slowly. Do a quick disgorgement here and overseas. Last week’s ECB decision by Mario Draghi to restart its QE only drags down Europe. He should sell the ECB’s bonds, handing that legacy to incoming ECB head Christine Lagarde —creating supply sanity. The Bank of England and Japan should do this, too. Return central bank balance sheets to historic normality by letting long rates rise. They couldn’t soar, because we haven’t much inflation. But they’d rise enough to re-steepen yield curves globally – and ignite lending.
Free-flowing money would boost business investment virtually everywhere that corporate capital expenditure has struggled. Long-shelved projects of corporate borrowers would finally get the green light. Homebuyers, too. Economies would accelerate. Stocks would love it.
So how about it, Fed? Ignore your low-interest rate tight money. Ignore the demand side. Let loan and money growth accelerate. Sell those trillions of bonds you never should have bought.
Ken Fisher is founder and executive chairman of Fisher Investments, author of 11 books, four of which were New York Times bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter: @KennethLFisher
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.