Question:
On 15/03/2017, the Chair of the US Federal Reserve, Janet Yellen, announced that the Federal Open Market Committee had decided overnight to raise the interest rate (riba) by a quarter of a percentage point. This is the second time the interest rate (riba) has been raised within three months, with indications that it will be raised twice more later this year. It is well known that raising the interest rate (riba) signifies an economic recovery, yet the American economy is still suffering from crises. What is the explanation for this? Thank you.
Answer:
Interest rates (riba) in America were reduced to nearly zero during the financial crisis in 2008 and remained so for seven years, until December 2015. At that time, Yellen also indicated that interest rates (riba) would be raised several times during 2016; however, the implementation of those hikes failed, and the rate was only raised once at the end of that year. To understand the reasons for raising or lowering the interest rate (riba), we note the following:
The objective of setting the interest rate (riba), which is practically carried out through decisions to buy and sell US Treasury bonds, is to determine monetary policy, specifically to know the extent of currency availability in the American markets. This is necessary for two basic reasons:
- Because a shortage of currency in the markets, if the interest rate (riba) is high, slows down economic growth because people are reluctant to borrow from banks due to the high interest rate (riba).
- Because an increase in currency in the market, if the interest rate (riba) is low, leads to inflation due to the increased money supply in the markets resulting from the demand for borrowing because of the low interest rate (riba).
Since 2015, Yellen has been saying that the interest rate (riba) needs to be raised because the economic recession that began a long time ago in America has ended, economic growth is improving, and raising interest rates (riba) now is better than raising them after inflation starts. This is Yellen's economic philosophy for raising the interest rate (riba).
This argument is unconvincing because the American economy remains weak. However, American—and indeed Western—monetary policy is linked to the decisions of politicians and is not based purely on economic factors as it is supposed to be. Similarly, the decisions of the US Federal Reserve are supposed to be independent of government policy, but the truth is that decisions regarding interest rates (riba) are par excellence political and proceed according to political and economic requirements. The seven governors of the US Federal Reserve are appointed by the US President with the approval of the Senate for a fourteen-year term. The Chair and Vice-Chair are also appointed from within the existing Board of Governors by the US President for a four-year term and can be reappointed several times during their tenure according to the US President's desire.
In practice, American monetary policy decisions are influenced by two political factors: one domestic and the other global:
- On the domestic front, American presidents want to strongly grow the American economy at election time because a strong economy supports the re-election of the president or his party's candidate.
- On the international level, America competes strongly with the economies of other countries. At this time, global economies are still weak due to the effects of the 2008 global economic recession. Interest rates (riba) in Europe and Japan were near zero, and raising interest rates (riba) in the United States will lead to a massive flow of funds toward America, which could have disastrous effects on the economies of other countries!
Raising the interest rate (riba) in the United States currently will be painful for other global economies, though perhaps not as much as it was last year. The New York Times reported on 09/03/2017 regarding Europe that official interest rate (riba) hikes may be years away. The European Central Bank left its benchmark interest rates (riba) unchanged and said it would continue stimulus measures to buy government and corporate bonds until the end of the year, albeit at a lower level starting next April.
China realized America's intent in raising the interest rate (riba)—to harass Europe and pull capital toward itself—so it raised its interest rate (riba) in synchronization with the American hike to prevent the flight of Chinese capital to the high interest in America and also to participate in attracting European capital. Thus, China was forced to announce an increase in the interest rate (riba) immediately after the American decision was issued. This was according to a report published on 16/03/2017 on the Bloomberg website titled "China’s Central Bank Raises Borrowing Costs in Step With Fed." The Chinese Central Bank's raising of borrowing costs is because a stable economy and a recovery in factories allow room to follow the Federal Reserve in tightening its policy.
In conclusion, the reason for raising the interest rate (riba) in America is not the recovery of the American economy, but rather to bring in capital from Europe to obtain a higher interest than in their own countries where the interest (riba) is near zero. The purpose is not only economic but, above all, to contribute to weakening Europe, plunging it into crises that lead to its dismantling.
29th of Jumada al-Akhirah 1438 AH 28/03/2017 CE