Dear Clients and friends,
Had you needed to know the time in 1825, you had 2 choices, the town clock or the sun. Fifty years later you may have had a watch, but you most likely had a Train that ran through your town at certain prescribed times. Today, most glance at their phones to tell time, but few understand just how odd that is in the story of human history. In just a few generations we have gone from having no real standardization of time across the globe to having standardizations of time across the globe with a peculiar thing called, “daylight savings time.”
Why did the world decide that it would be a good idea to create standard time zones? The answer is quite simple, the business of transportation required that accurate and measurable time be used so we could have a global transportation system that worked efficiently and reliably. What does the story of time zones have to do with interest rates you might ask? Today the Fed is on the cusp of lowering rates in the midst of an economic boom here in the US. It looks risky, some argue that it will create a bubble, others just say that it is preemptive because things are about to get really bad. When you look around the world you notice that almost every developed economy has ultra-low to negative interest rates. The US seems to be stuck in a different time zone, and maybe the Fed is responding to this reality.
Interest rate policy is a very blunt tool, it doesn’t have the surgical precision that one would expect it to have given the amount of time the media spends on the Feds policy. Over a week ago Fed Chairman Powell explained that lowering rates might be warranted given the economic backdrop of the global economy. He gave the markets a few reasons, like trade and slowing growth in the EU that he would consider in making the decision. Even in the 20th century there were towns that kept their own time by a church clock that differed from a town 50 miles away, so too are interest rates today. In a global financial system, interest rates are like time, the more they differ from place to place the more dislocation and inefficiency we tend to sustain. The Fed is having to decide on whether or not they keep rates where they are because their models suggest this is in order, or to lower rates because the confluence of global factors is creating a signal to lower rates.
In 1884 the standardization of times between developed nations changed the way ports, trains and eventually planes would operate. By the time WW1 had started, most of the world was working with standard time, and this was a byproduct of global business. Today we are experiencing something similar in interest rate policy, where the global money flows are being distorted by large variations in interest between nations and borders. While no one is arguing for a global interest rate, the Fed may be using global interest rates as a factor in their policy calculus.
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