Slow Growth for US Interest Rates

US Interest Rates Will Continue to Rise

However, he believed that as the interest rate rise cycle of the Hong Kong Bank began and the Hong Kong dollar interest rates were normalizing, the situation that Hong Kong dollar interest rates were lower than US dollar interest rates would change in the future.

Interest Rates

The trend of Hong Kong dollar interest rates and US dollar interest rates will be more consistent. Everyone must be more careful to manage risks and prepared to cope with market fluctuations.

Because the US Federal Reserve and other central banks have driven their short term interest rates close to zero, they cannot lower rates further in order to prevent deflation from raising the real rate of interest. Higher real interest rates discourage credit financed purchases by households and businesses.

If it falls 40 against the yen sometime in the next ten years, US long term interest rates should be four percentage points higher than Japanese rates. If it falls 60 against China s currency, the yuan, sometime in the next ten years, US long term interest rates should be six percentage points higher than Chinese rates.

When Interest Rates Rise

The Trouble With Interest Rates

Interest rates are still low.

Interest rates and inflation were high.

Interest payments on the debt eventually become so burdensome that bondholders demand higher interest payments (Greek debt recently yielded over 30 ). Interest rates on US government debt remain low, so this threat is prospective, but future deficits will be far higher than government projections when rates normalize.

The US housing boom is due, first, to low interest rates, which mean that large amounts of money can be borrowed for mortgages with moderate monthly payments. Low interest rates strengthen the ability to pay, and thus boost demand.

In the US, households have a prepayment option on their mortgages should interest rates fall. Moreover, mortgages are usually securitized.

But real interest rates did not fall enough, because nominal interest rates cannot go below zero. By increasing inflation, the Fed would turn real interest rates seriously negative, thereby coercing thrifty households into spending instead of saving.

on the interest rates on private loans.

The Long Mystery of Low Interest Rates

Fortunately, the market consensus concerning the dollar s inevitable rise as US interest rates increase is almost certainly wrong, for three reasons.

This recalls a familiar historical pattern. Falling real (inflation adjusted) interest rates in the 1970s, 2002 2004, and 2007 2008 were accompanied by rising real commodity prices sharp increases in US real interest rates in the 1980s sent dollar commodity prices tumbling.

China s Five Year Plan and Global Interest Rates

Do Low Interest Rates Ensure High Asset Prices?

Another interpretation is that awash with liquidity merely means that interest rates are low. But interest rates have been increasing around the world since 2003.

Both were reluctant to lower interest rates markedly. Indeed, financial markets may have taken the Fed s view on US inflation as representative of other central banks outlook on inflation, reinforced by the surprising ECB decision of October 2 to keep interest rates on hold.

Inflation and interest rates in Japan lately have been even lower than in the US. The most important component of Abenomics this year has been the BOJ s efforts to ease monetary conditions further, despite zero interest rates, and thus end the threat of deflation.

The total foreign debt of US residents (most of which is in US dollars) is above 7 trillion. This implies that any reduction in US interest rates would benefit the country as whole, relative to creditor countries, like Germany, where interest income would fall.

A normal US economy has a short term nominal interest rate of 4 . Since the ten year US Treasury bond rate tends to be one percentage point above the average of expected future short term interest rates over the next decade, even the expectation of five years of deep depression and near zero short term interest rates should not push the 10 Year Treasury rate below 3 .

Bank of England to keep interest rates at 0.25

Will Rising Interest Rates Torpedo Stock and House Prices?

The zero lower bound arises because nominal interest rates cannot fall below zero. But if nominal interest rates stay positive, while inflation is negative, then real interest rates may become too high for an economy in recession, causing recession to become more severe and prolonged.

Today, as in the 1960 s or 1970 s, we face a fundamentally global problem of inconsistent monetary policies. Back then, Europeans complained that low interest rates in America were driving global inflation now low US interest rates are blamed for driving irresponsible asset price booms.

The US Federal Reserve faces a dilemma, for it needs to continue raising interest rates in the face of a hurricane devastated economy. The Fed s failure to raise rates earlier thus holds a powerful lesson for the European Central Bank after a prolonged period of monetary stability at unusually low interest rates, waiting too long to raise rates to more normal and appropriate levels holds dangerous consequences.

There is no question that emerging markets are highly sensitive to global market conditions, including not only changes in short term US interest rates, but also other financial risks, as measured, for example, by the volatility index VIX. Capital flow bonanzas, often spurred by low US interest rates and calm global financial markets, end abruptly when these conditions reverse.

In 2005, US Federal Reserve Chair Alan Greenspan pointed to the phenomenon as an explanation for his famous conundrum interest rates on Treasury bonds were lower than market conditions appeared to warrant. His successor, Ben Bernanke, similarly pointed to purchases of US debt by foreign central banks and governments as a reason why American interest rates were so low.

In this case, the price of loanable funds is the real interest rate. An expectation that interest rates will be high sometime in the next decade should mean high interest rates on long term bonds today.

If the Federal Reserve raises interest rates, China must follow suit to keep capital from flowing out, despite the negative impact of higher interest rates on domestic growth. Given the US dollar s dominance in international transactions, Chinese companies investing abroad also face risks associated with exchange rate fluctuations.

In normal times, any effort by a central bank to take short term interest rates too low for too long will boomerang. Short term market interest rates will fall, but, as investors begin to recognize the ultimate inflationary consequences of very loose monetary policy, longer term interest rates will rise.

Raising interest rates won t have much impact on the international price of grains or fuel. Indeed, given the size of the US economy, a slowdown there might conceivably have a far bigger effect on global prices than a slowdown in any developing country, which suggests that, from a global perspective, US interest rates, not those in developing countries, should be raised.

When the markets see that coming, they will drive Italy s sovereign interest rates even lower. Given Italy s very large national debt, interest payments add more than 5 of GDP to the fiscal deficit. The combination of economic recovery and lower interest rates would produce a virtuous dynamic in which falling interest rates and a rising budget surplus are mutually reinforcing.

In theory, as the economy picks up and interest rates begin to climb, central banks will simply pay higher interest rates on their reserves, so that they can finance their holdings of long term securities and shrink them slowly. But higher interest rates also imply large capital losses for central banks asset holdings.

In a country with large fiscal deficits, the central bank may have to keep interest rates high to control inflation. In this scenario, budget cuts create room for interest rates to fall.

US interest rates did not really rise in 2014, so most of these mechanisms are not yet directly at work. But speculators are thinking ahead and shifting out of commodities today in anticipation of future higher interest rates in 2015 the result has been to bring next year s price decrease forward to today.

Although governments may try to cram public debt down the throats of local savers (by using, for example, their rising influence over banks to force them to hold a disproportionate quantity of government paper), they will eventually find themselves having to pay much higher interest rates as well. Within a couple years, interest rates on long term US Treasury notes could easily rise 3 4 , with interest rates on other governments paper rising as much, or more.

Moreover, ECB chief economist Otmar Issing predicts long term interest rates would go up not down as inflationary expectations increased. So cutting interest rates would not only be stupid it would be crazy.

Europe must ask itself how can interest rates induce a slowdown in 2007 when real interest rates have hardly budged despite an economically healthy 2006? Moreover, because profits are high in Europe, likely future increases in real interest rates needed to ensure price stability easily can be financed out of profits without economic disruption.

Third, contributing factors included low interest rates, compressed risk spreads, and global imbalances that accommodated low savings in the US, consumption in excess of output, and a mounting trade deficit. Absent the willingness of large developing countries to run trade surpluses and high savings rates relative to investment, the asset bubble in the US leading to a rise in domestic consumption and a fall in the savings rate would have triggered inflation and higher interest rates.