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Thread: Markets betting on near-zero interest rates for another decade

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    Markets betting on near-zero interest rates for another decade

    Markets betting on near-zero interest rates for another decade

    This is bad news. Especially for savers.

    World markets may have recovered their poise from a torrid start to the year, but their outlook for global growth and inflation is now so bleak they are betting on developed world interest rates remaining near zero for up to another decade.

    Even though the U.S. Federal Reserve has already started what it expects will be a series of interest rate rises, markets appear to have bought into a "secular stagnation" thesis floated by former U.S. Treasury Secretary Larry Summers.


    The idea posits that the world is entering a peculiarly prolonged period in which structurally low inflation and wage growth - hampered by aging populations and slowing productivity growth - means the inflation-adjusted interest rate needed to stimulate economic demand may be far below zero.


    As there's likely a lower limit to nominal interest rates just below zero - because it's cheaper to hold physical cash and bank profitability starts to ebb - then even these zero rates do not gain traction on demand.
    ΜOΛΩΝ ΛΑΒΕ


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    Yellen and crew keeps interest rates on hold...

    US Fed keeps interest rates on hold
    Wed, 27 Apr 2016 - The US Federal Reserve has kept interest rates between 0.25% and 0.5%, the rate its held since December.
    The Fed said while conditions have improved, the central bank is still waiting for inflation to reach 2%. In its statement the Fed said it would "carefully monitor actual and expected progress toward its inflation goal" as it weighed when next to raise rates. Most investors expected rates to remain on hold, and were looking for changes to the Fed's assessment of the economy. In its statement accompanying today's decision, the Fed's Open Market Committee pointed to strengthening in the labour market and improved household spending, as positive signs. "Labour market conditions have improved further even as growth in economic activity appears to have slowed," the Fed said. The unemployment rate fell below 5% in January.

    Global risks fade

    The central bank appeared to be less focused on global financial risks to the US economy. A slowing economy in China and falling oil prices have weighed on the Fed's past decisions, but appeared to be less important this time around. Its latest update omitted the line "global economic and financial developments continue to pose risks," which was included in its March statement. "The omission of the warning about global risks leaves the door open to a June rate hike, but whether the Fed follows through will depend on what happens in financial markets over the next six weeks," said Paul Ashworth from Capital Economics.

    In its statement the Fed said low oil prices and poor exports early in the year had contributed to weak inflation. Additionally, while the housing sector has continued to strengthen, the Fed said business investment and exports remained "soft". Chair of the Federal Reserve Janet Yellen has continually called for a gradual adjustment to rates. But she has always maintained that the Fed should consider new information as it becomes available, and stressed that the Fed could raise rates at any of its future meetings.

    Most economists only expect two rate increases in 2016. The bank's next chance to raise rates will be when it meets in June. Esther George, president of the Kansas City Fed, voted against the decision to keep rates on hold. Ms George said in February that interest rates should rise because the US economy was in a "generally good position" despite volatile movements on the stock markets.

    http://www.bbc.co.uk/news/business-36154150

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    The next wave coming is corporate bankruptcies. With the years of loose money many business took cheap loans but poorly invested it. Loose money policy creates the danger of malinvestment.
    ΜOΛΩΝ ΛΑΒΕ


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    Long range interest rate forecast cut...

    Fed again poised to cut longer-run interest rate forecast
    Tue Sep 20, 2016 | U.S. Federal Reserve policymakers are set this week to again cut their forecasts for how high interest rates will need to go in an economy where output, productivity and inflation are growing at a slower pace than in past decades.
    It would be the fourth time in 15 months that the U.S. central bank has been forced to admit its estimate of this so-called neutral rate was too optimistic, raising questions about the health of the economy in the coming years. The Fed, however, still insists low interest rates and its large balance sheet of bonds are sufficient to continue bolstering economic growth. Conversations with Fed officials suggest some will cut their predictions for the longer-run rate at this week's monetary policy meeting, with the median forecast possibly falling to 2.75 percent. It was 3.75 percent in June 2015 and 4.25 percent four years ago.

    The Fed is expected to leave its benchmark overnight interest rate unchanged following its two-day meeting on Wednesday, according to a Reuters poll of economists. The Fed's policy rate has been about 0.38 percent since it was raised in December, the first increase in nearly a decade. The expected reduction in the longer-run neutral rate forecast amounts to a lower speed limit on future rate hikes, and points to fewer increases with longer gaps between them than U.S. central bankers and investors had expected. The lower the neutral rate forecast, the less anxious the Fed needs to be about tightening policy, which would justify its repeated decisions to defer rate increases.

    The result, says San Francisco Fed President John Williams, will be the "shallowest" set of rate hikes ever; "much flatter," according to Dallas Fed President Robert Kaplan in a separate conversation, than anything in the past. The Fed has not raised rates this year despite signaling in December that four rate hikes were coming in 2016. That number has since been scaled back to two hikes this year, with another three hikes in 2017, due to a global growth slowdown, financial market volatility and tepid U.S. inflation.

    But given the new thinking on the neutral rate, that seems overly optimistic. Fed policymakers say an aging U.S. population and decline in productivity growth is sapping economic potential, making them wary about raising rates too fast. "They are not very far from being in a tightening mode," said Shehriyar Antia, founder of Macro Insight Group and a former senior analyst at the New York Fed. "That augers for more patience since the risk of you falling behind with inflation is less because it ain't going to take that much for rates to lean on inflation."

    FED TOOLBOX

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    Fed: Interest rates unchanged...

    Fed keeps rates steady, signals one hike by end of year
    Wed Sep 21, 2016 | WASHINGTON - The U.S. Federal Reserve left interest rates unchanged on Wednesday but strongly signaled it could still tighten monetary policy by the end of this year as the labor market improved further.
    Fed Chair Janet Yellen, speaking after the central bank's latest policy statement, said U.S. growth was looking stronger and rate increases would be needed to keep the economy from overheating and fueling high inflation. "We judged that the case for an increase has strengthened but decided for the time being to wait," Yellen told a news conference. "The economy has a little more room to run." Yellen said she expected one rate increase this year if the job market continued to improve and major new risks did not arise. The Fed kept its target rate for overnight lending between banks in a range of 0.25 percent to 0.50 percent, where it has been since it hiked rates in December for the first time in nearly a decade.

    The central bank has appeared increasingly divided over the urgency of raising rates. On Wednesday, Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren dissented on the policy statement, saying they favored raising rates this week. At the same time, policymakers cut the number of rate increases they expect this year to one from two previously, according to the median projection of forecasts released with the statement. Three of the 17 policymakers said rates should remain steady for the rest of the year.

    The Fed also projected a less aggressive rise in interest rates next year and in 2018, and cut its longer-run interest rate forecast to 2.9 percent from 3.0 percent. Investors did not appear to significantly shift their bets on the timing of the next rate hike. Prices for fed funds futures contracts suggested investors continued to see just better-than-even odds of a hike at the December policy meeting, and almost no chance of an increase in November.

    U.S. stock prices rose after the Fed released its statement. The dissents from those wanting a hike this week suggested to some economists that pressure was building. "While the Federal Reserve held rates unchanged, the highly unusual 7-3 vote points to the depth of its policy dilemma and makes a December hike more likely," said Mohamed El-Erian, chief economic adviser at Allianz.

    FOCUS ON DECEMBER

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    The FED signaling anything is like a meteorologist telling me it's going to be sunny and 80˚ in two weeks.

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    Trump says not thrilled with Fed's Powell for raising rates...

    Exclusive: Trump says not thrilled with Fed's Powell for raising rates

    AUGUST 20, 2018 | WASHINGTON (Reuters) - U.S. President Donald Trump said on Monday he was “not thrilled” with Federal Reserve Chairman Jerome Powell for raising interest rates and accused China and Europe of manipulating their respective currencies.
    Trump, who spooked investors in July when he criticized the U.S. central bank’s monetary policy tightening, told Reuters in an interview that he believed the Fed should be more accommodating. “I’m not thrilled with his raising of interest rates, no. I’m not thrilled,” Trump said in the interview, referring to Powell. Trump nominated Powell last year to replace former Fed Chair Janet Yellen. American presidents have rarely criticized the Fed in recent decades because the independence of the Fed is seen as important for economic stability.



    U.S. stocks dipped after Trump’s comments to Reuters and the dollar .DXY edged down against a basket of currencies. Trump, who also criticized the Fed as a candidate for president in 2016, said other countries benefited from their central banks’ moves during tough trade talks, but the United States was not getting support from the Fed. “We’re negotiating very powerfully and strongly with other nations. We’re going to win. But during this period of time I should be given some help by the Fed. The other countries are accommodated,” Trump said.



    The Fed has raised rates twice this year and is expected to do so again next month. “I think China’s manipulating their currency, absolutely. And I think the euro is being manipulated also,” Trump said. Trump has made reducing U.S. trade deficits a priority and the combination of rising interest rates and a strengthening dollar pose risks for export growth.

    Asked on Monday if he believed in the Fed’s independence, Trump said: “I believe in the Fed doing what’s good for the country.”
    Powell took over as Fed chief earlier this year. “Am I happy with my choice?” Trump said to Reuters about Powell. “I’ll let you know in seven years.”


    https://uk.reuters.com/article/us-us...-idUKKCN1L5207

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