In America It’s the Season to Push Down Interest Rates

The printing of currency in the United States and the process of raising global liquidity has been stopped. We have now entered a new phase.

We are in the fourth year of the global financial crisis; hopes of emerging from it rest heavily on the shoulders of central banking institutions. In America and Europe, central banks are doing “somersaults upon somersaults,” as the saying goes, to minimize the symptoms of economic woes.

According to a Wall Street Journal piece from the other day, the Federal Reserve is about to embark on a third monetary expansion operation. The Fed will buy long-term treasury bonds or mortgage-backed securities, and in exchange it will make money from its market earnings on short-term reverse repurchases or deposit auctions. There will not be any change in the liquidity of the dollar with these operations.

The Fed’s intention is to intervene in the slumping profitability of the bond market. This is a monetary operation to keep the interest rates low on long-term deposits. We cannot refer to this by the customary term “quantitative easing.” Calling it “squashing the profitability curve” is more appropriate.

First Money Was Printed

It wouldn’t be off the mark to say that today’s political environment and current policy conditions are agreeable to this arrangement. Let’s remember:

QE1: The Fed pumped a total of 1.5 trillion dollars into the market by purchasing treasury bonds and mortgage-backed securities from the end November 2008 to March 2010.

QE2: Securities purchases continued in a second wave of purchases that the Fed started later between November 2010 to July 2011. In this wave, a net purchase of $600 billion was made.

Operations made by the Fed following July 2011 didn’t affect the liquidity of the market, but were part of a policy aimed at influencing interest rates and expectations.

In September 2011 the Fed announced “QE2.5” or “Operation Twist,” in which it would purchase $400 billion in long-term securities, but also sell the same amount in short-term securities. The intention was to put downward pressure on long-term interest rates.

The Fed’s latest announcement in January 2012 was a reassurance that until the middle of 2013 short-term interest rates would be held steady at 0.25. Last month the predictions of the Fed’s Free Market Committee, the decision-making body on monetary policy, shared its predictions with the public. According to the estimates made in January, the steady rate predicted for 2013 could be extended until the end of 2014. The Fed’s published report stated that 11 out of 17 committee members wished for a raise in interest rates to come at the end of 2014.

The Interest Rate Seesaw

The interest rate on short-term securities will be held at 0.25 until 2014, roughly. The Fed’s second move after “Operation Twist,” purchasing long-term securities, will cause the profitability curve on them to sink.

This picture shows that monetary expansion in the U.S. has been left behind and the Fed is making way for a monetary circulation system in its place that will reshape the profitability curve.

It can be understood that in this new process that begins with “Operation Twist,” the Fed is seeking to avoid the risk of another bubble that might be result from the inflation brought on by monetary expansion.

And this picture says to us that the printing of currency in the United States and the process of raising global liquidity has been stopped. We have entered a new phase. Money will not continue to be printed at existing rates. Due to the financial crises in Europe, printed money is also being stored at the central banks. You can see that “the party’s over” for developing countries, as well. It is indisputable that financiers will have to pay more attention to the balance of payments than in the old days.