Criticism of Fed policy goes global
November 10, 2010
From a Money Rates perspective, the immediate concern about the quantitative easing program announced by the Federal Reserve is that it is yet another blow to interest rates on savings accounts, money market accounts, and CDs. There are additional concerns, and the chorus of criticism has grown to include some significant foreign voices.
Global heavyweights Germany, China, Brazil, and Japan have all raised concerns about the Fed's policy. These are the countries that trade with the U.S. and hold U.S. debt -- in other words, widespread alienation of these countries could cost America in the long run.
The international community has two primary beefs with the Federal Reserve's policy:
- Although it is not a stated goal of the program, quantitative easing may boost U.S. exports by making the dollar cheaper. In fact, this would be a far more likely outcome than the stated goal of stimulating domestic loan demand, except for one thing -- other countries won't stand still while the U.S. maneuvers itself into an advantageous trade position. Setting off a trade war is the last thing the U.S. needs when foreign economies are becoming global engines of growth.
- Devaluing the dollar also devalues the massive holdings of U.S. securities that foreign countries hold. If the U.S. expects those countries to continue to finance its budget deficit, it may not want to trash the value of its securities.
In short, what the Fed needs to be concerned about is not just alienating the global economic community, but the fact that doing so could create a backlash in trade and investment that the U.S. can ill afford.
Reverberations for savings and money market accounts?
Meanwhile, this all feeds back into concern over money market rates and other deposit rates. A lower dollar could feed inflation, and if it also touches off trade retaliation, it could also blunt U.S. exports. Those conditions would contribute towards a worst-of-both-worlds scenario for bank deposits -- inflation rising faster than interest rates.