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    High interest rate policy of the USA

    Fatih Özatay, PhD11 June 2009 - Okunma Sayısı: 923


    Some developments about the Treasury bill market of the USA and the news about the said market has become quite interesting lately. Interest rate of long term USA bills has risen significantly in the week before. This rise was also addressed by FED President Bernanke who pointed out the relationship between the rise and the unsustainability of the current fiscal policy and made a speech on the importance of fiscal discipline. Yesterday, prominent economics news channels announced this: T-bill tender hold by the US Treasury received a considerable demand. This way, US Treasury easily made borrowing.

    That the rise in treasury bill interest rates due to the rise in risk premium and Treasury tenders qualify as news; and that it is implied they are overcame soft and sound are developments we were familiar with in the near past. Over the long years involving the pre-2001 crisis period, the question "will this week's tender receive offers and will the Treasury be able to make borrowing" both occupied our minds and led to tensions in the markets. It appears that such doubts can also apply for the greatest economy of the world.

    However, those doubts prove once more that it is of great importance to sustain fiscal discipline independent of the signing of an agreement with the IMF. Otherwise, you are punished with high real interest rate. To the top of it, as long as you insist on undisciplined behaviors the risk of being not able to borrow even at the high interest rate appears.

    Sometimes such hypotheses are raised and those receive such broad acceptance that you cannot prevent those hypotheses turn into 'pure truth' even though they are in contradiction with the economic theory and phenomena and you express that contradiction. Because you cannot prove that the hypotheses are wrong with a laboratory experiment. However, crises offer us this opportunity serving as laboratories.

    I believe you can guess where this story goes to. Isn't it the correct time to ask the following question: For God's sake, do interest rates of long term US bills rise since FED implements high interest rate policy? How do interest rates of long term US bills rise given that the target interest rate of FED varies between 0 and 0.25 percent?

    I hope ears of those arguing that the Central Bank of the Republic of Turkey has been implementing 'high interest low exchange rate' policy for years. In the meanwhile it is wise to remind it once more: Hitting the trough does not mean the trough will be left behind overnight. In the forthcoming period demand for goods we export will be lower than in the past. Moreover, international financial system will not be extending as much credit as before to countries like Turkey.

    If these conditions apply over a long period of time, we might need new policies to boost domestic demand. The main way to accomplish this without damaging the fiscal discipline and thus without leading to a tension in the markets is to construct a framework that will prove the fiscal policy is sustainable in the medium-long term, i.e. to switch to a fiscal rule regime which is credible with its all units as it is in inflation targeting.


    This commentary was published in Radikal daily on 11.06.2009