Yesterday, the U.S. Federal Reserve elected to maintain its key interest rate at 5.25%, now unchanged since June 2006. Again, the Fed expressed concern about domestic inflation as the reason it is not slashing interest rates.
As usual, I have another spin on things:
I don’t believe inflation is a real concern of the Federal Reserve because, ironically, the Fed is creating inflation by expanding the money supply so aggressively each passing month. If the Fed is so concerned about inflation, why doesn’t it simply stop expanding the money supply?
Halfway around the world, this morning we get news Britain has increased its key lending rate to 5.5%. Britain now has the honor of having the highest lending rates of the G-7… bumping the U.S. off the top of the list. (Another interest rate increase is expected in the U.K. at the next Bank of England meeting.)
The real reason U.S. interest rates are not falling, despite the risk of recession in America growing every day, is because our inflated interest rates are propping up a very fragile U.S. dollar. As I wrote on Monday, the U.S. dollar is at an all-time low against the Euro, a 15-year low against the Pound and a 29-year low against the Canadian dollar.
While a lower-priced U.S. dollar may be in the best interest of the U.S., the decline of the greenback needs to be gradual so as not to frighten off buyers of our government-issued debt securities. And that’s the simple reason as to why interest rates did not fall yesterday.
Yes, interest rates need to decline in America desperately to jumpstart the weak U.S. housing market and help us avoid a made- at-home recession. But the expanding global economy is starting to tighten the hands of an American economy that was used to doing whatever it liked in the past. Expect interest rates to fall ever so slowly in the U.S.