Has The Power Of Low Interest Rates Been Played Out?

[AdvancingTime]

It is interesting to speculate what might of happened if Paul Volcker had not nipped inflation in the bud back in 1980. By the end of the 70s inflation started to soar by taking interest rates to nose bleed levels then Fed Chairman Paul Volcker brought inflation back under control. To those of us who years ago never envisioned the super low artificial interest rates of today it is most ironic to see the concept of negative rates proposed in an effort to continue milking this effect.

Sadly, when low rates are coupled with a massive expansion of new money creation, growing credit spawns debt that at some point overwhelms us and cannot be repaid. At that point this policy yields diminishing returns and has been compared to pushing on a string. The article below delves deeper into the question of whether the power of low interest rates and all the benefits garnered from them are now behind us.

http://brucewilds.blogspot.com/2016/01/has-power-of-low-interest-rates-been.html

 

[waltky]

Fed likely to keep rates steady to calm the markets...

Fed seen keeping interest rates steady amid market volatility
Wed Jan 27, 2016 - The Federal Reserve is expected to leave interest rates unchanged on Wednesday and acknowledge that turmoil in financial markets threatens its upbeat view of the U.S. economy, leaving the chances of a March hike diminished but alive.

All 69 analysts in a Reuters poll see the central bank keeping its key overnight lending rate in a range of 0.25 percent to 0.50 percent when it issues its policy statement following a two-day meeting. The decision is due at 2 p.m. EST (1900 GMT). A month-long plunge in U.S. and world equities has raised concerns that an abrupt global slowdown could act as a drag on the U.S. economy, with investors now betting on only one quarter-point rate hike in 2016 instead of the four signaled in Fed policymakers' economic forecasts last month. The Fed probably does not want to appear too worried by market and economic volatility that could prove temporary, and its rate-setting committee may soften concerns by pointing to solid U.S. job growth.

Many economists expect the central bank to say in its policy statement it is closely following global economic and financial events, as it did following a bout of market turbulence last summer. That language did not appear in its December statement. "This would constitute a moderate acknowledgement of risks that avoids shutting the door to a March hike," Goldman Sachs economist David Mericle said. U.S. economic growth will accelerate this year to 2.4 percent from 2.1 percent last year, according to the median forecast of Fed policymakers last month. New forecasts are not due until March. Prices for Fed funds futures imply that investors currently see about a 30 percent chance of a rate increase in March, a move that would make the likelihood of four hikes over the year more plausible.

The Federal Reserve headquarters in Washington​

The Fed raised rates by a quarter point on Dec. 16 in a sign the economy had largely recovered from the 2007-2009 financial crisis and recession and was shrugging off weakness in China, Japan and Europe. U.S. exports took a hit last year, in part due to the impact of a strong dollar .DXY, but consumer spending accelerated and overall employment surged by 292,000 jobs in December. Investors saw almost no chance of a January rate hike and expected only two hikes for the whole year even before the Standard & Poor's 500 index .SPX fell 8 percent in the first three weeks of the year.

Oil prices have also plummeted this year, which could keep U.S. inflation below the Fed's 2 percent target for longer, but a recent uptick in the consumer price index outside of food and energy could point to a stronger medium-term inflation outlook. Fed policymakers will be able to sift through the January and February employment reports before their March 17-18 policy meeting. "The Fed has the luxury of waiting to see what happens," economists at Cornerstone Macro wrote in a note to clients last week, saying the central bank's challenge will be to balance financial market concerns with "the encouraging news on both the employment and inflation fronts."

Fed seen keeping interest rates steady amid market volatility

See also:

Oil weakens as profit-taking kicks in ahead of stocks data
Wed Jan 27, 2016 - Crude oil futures declined on Wednesday, heading back towards $30 a barrel as profit-taking wiped out a chunk of the gains notched up in the previous session on hopes for output cuts.

Prices were also dampened by a bigger-than-expected build in U.S. crude inventory and worries about the economy in China, the world's second-largest oil consumer. Brent crude LCOc1 had declined 18 cents to $31.62 a barrel by 0611 GMT, after hitting a session low of $31.05 a barrel. It settled up $1.30 at $31.80 on Tuesday. U.S. crude CLc1 fell 46 cents to $30.99 a barrel, recovering slightly from a session low of $30.30 a barrel. It ended Tuesday $1.11 higher at $31.45 a barrel. "The positive sentiment stemmed from strong U.S. corporate earnings and talk of OPEC and Russia considering production cuts. We consider the likelihood of any agreement between these parties as extremely low," ANZ said in a note on Wednesday. "However, rising U.S. crude stockpiles are likely to remain a headwind in the near term. At the current pace, the U.S. crude stockpiles will cross the all-time high of April last year in the next month."

A natural gas flare on an oil well pad burns as the sun sets outside Watford City, North Dakota​

Daniel Ang at Phillip Futures said: "With the U.S. ability to produce oil in much higher quantities, it will be difficult to support prices with supply cuts. Therefore, it is probably the case that even if major producers want higher prices, they may not be able to achieve this without everyone's blessing." "Inventory figures, if continuing to grow, would remind the market of the current oversupply. This would possibly be a bad sign for oil prices." U.S. crude stocks rose by 11.4 million barrels in the week to Jan. 22 to 496.6 million, compared with analyst expectations for an increase of 3.3 million barrels. Crude stocks at the Cushing, Oklahoma, delivery hub fell by 664,000 barrels, data from industry group the American Petroleum Institute showed on Tuesday. [API/S]

The fall in oil prices was limited as Venezuela's oil minister will tour OPEC and non-OPEC countries in a bid to drum up support for joint action to stem the tumble in crude prices, President Nicolas Maduro announced on Tuesday night. Also three major U.S. shale oil companies have slashed their 2016 capital spending plans more than expected in a bid to survive $30 a barrel oil prices, with one of them saying prices would need to rise more than 20 percent just to turn a profit. U.S. and Brent crude prices rallied on Tuesday after the oil minister of Iraq said that OPEC kingpin Saudi Arabia and top non-OPEC producer Russia were showing signs of flexibility about agreeing to tackle an oil glut that has pushed prices to 12-year lows. Asian stocks were subdued on Wednesday as a wait-and-see mood prevailed ahead of a Federal Reserve policy statement due later in the day.

Oil weakens as profit-taking kicks in ahead of stocks data

 

[EdwardBaiamonte]

Sadly, when low rates are coupled with a massive expansion of new money creation,

actually rates have stayed low because it has not resulted in a increased money supply, let alone in a massively increased money supply and thus massive inflation!! Do you understand??

 

[waltky]

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.

US Fed keeps interest rates on hold - BBC News

 

[jwoodie]

Sadly, when low rates are coupled with a massive expansion of new money creation,

actually rates have stayed low because it has not resulted in a increased money supply, let alone in a massively increased money supply and thus massive inflation!! Do you understand??

No need for snide remarks.

 

[Gary Anderson]

actually rates have stayed low because it has not resulted in a increased money supply, let alone in a massively increased money supply and thus massive inflation!! Do you understand??

I agree. Plus, rates are low because long bonds are in massive demand as collateral in the massive derivatives market. So, how can bonds be a measure of anything? There is a safe way to increase the money supply, without any government debt. You guys should consider this approach: Responsibly Expand The Monetary Base Before It Is Too Late

 

[EdwardBaiamonte]

actually rates have stayed low because it has not resulted in a increased money supply, let alone in a massively increased money supply and thus massive inflation!! Do you understand??

I agree. Plus, rates are low because long bonds are in massive demand as collateral in the massive derivatives market. So, how can bonds be a measure of anything? There is a safe way to increase the money supply, without any government debt. You guys should consider this approach: Responsibly Expand The Monetary Base Before It Is Too Late

so how would you expand monetary base???

 

[waltky]

Rate hike in June unlikely...

Wall Street gives up on June rate hike by Fed after payrolls disappoint: poll
May 06 2016 - Wall Street's top banks have all but abandoned any expectation that the Federal Reserve will raise interest rates in June, and most now see the U.S. central bank's next rate hike coming in September, according to a Reuters survey conducted on Friday.

Friday's weaker-than-expected payrolls report for April acted as the catalyst for several economists at primary dealers to back away from their previous predictions for an interest rate increase at the Fed's next meeting in June. Moreover, conviction among primary dealers that the Fed would pull off more than one hike in 2016 is quickly eroding as well, with the soft employment data standing as only the latest indicator that U.S. economic growth is far from robust. U.S. employers added 160,000 jobs in April, the fewest in seven months. Economists had anticipated more than 200,000 jobs had been added last month. "This report did very little to make the case for a June rate hike," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. "The data today really underscores our view that the Fed will want to see more data before hiking rates further."

TD Securities' economists were among those shifting their view on the next rate hike to September in Friday's survey from June in a similar poll taken one month ago. Reuters surveyed the 23 primary dealers, the largest banks authorized to trade directly with the Fed, following Friday morning's release of the monthly U.S. payrolls report, and had input from 18. Fifteen of those 18 forecast the federal funds rate will remain at its current level of 0.25 percent to 0.50 percent at the end of the second quarter. In April, 10 of 16 dealers expected the Fed to raise rates by the end of June. Thirteen of the 18 expect the Fed to lift rates by a quarter percentage point to a range of 0.50 percent to 0.75 percent by the end of the third quarter.

Meanwhile, just nine of 17 respondents see a second rate hike later in 2016 to a range of 0.75 percent to 1.00 percent. A month ago, 12 of 16 had forecast at least two rate hikes this year. "They need more time to be sure that the weakness in the first quarter is temporary," said Dana Saporta, economist at Credit Suisse. "The first rate hike will likely come in the second half (of the year), starting with one in September, followed by one in December." Most dealers said their conviction about a rate hike by the end of June had decreased since last month, and the median probability assigned by them to a June increase fell to 18 percent from 50 percent in April.

The dealers also lengthened their estimated timeline before the Fed would start reducing its $4.45 trillion balance sheet. The median forecast indicates no reduction before 2018 compared with mid-2017 in April's survey. Dealers continue to see very little probability that the Fed will employ negative interest rates as several of its peer central banks have done around the world. Respondents see just a 10 percent probability of the Fed following suit, unchanged from the April survey.

Wall Street gives up on June rate hike by Fed after payrolls disappoint: poll

 

[EdwardBaiamonte]

It is interesting to speculate what might of happened if Paul Volcker had not nipped inflation in the bud back in 1980. By the end of the 70s inflation started to soar by taking interest rates to nose bleed levels then Fed Chairman Paul Volcker brought inflation back under control. To those of us who years ago never envisioned the super low artificial interest rates of today it is most ironic to see the concept of negative rates proposed in an effort to continue milking this effect.

Sadly, when low rates are coupled with a massive expansion of new money creation, growing credit spawns debt that at some point overwhelms us and cannot be repaid. At that point this policy yields diminishing returns and has been compared to pushing on a string. The article below delves deeper into the question of whether the power of low interest rates and all the benefits garnered from them are now behind us.

http://brucewilds.blogspot.com/2016/01/has-power-of-low-interest-rates-been.html

low interest rates have no power to speak of. An economy grows when people invent things not when liberal govt prints money!

 

[AdvancingTime]

[QUOTE="EdwardBaiamonte, "low interest rates have no power to speak of"

I beg to differ, the amount of interest people receive on their savings or capital affects how much they spend. Also when interest rates are low making home mortgage payments are lower so people can afford a more expensive home, this effects the value of the house by altering supply and demand. Low interest rates are a double edged sword.
http://brucewilds.blogspot.com/2013/03/low-interest-rates-and-their-cost.html

 

[Dovahkiin]

Liquidity trap. We need large deficits.

 

[Rshermr]

Liquidity trap. We need large deficits.

Agreed. In the correct (stimulative) areas. But has been the case now since 2008, and congress refuses to approve. I believe they simply want the economy to fail, so they can blame it on the other party. And the middle class suffers.