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3 Reasons Interest Rates Will Stay Low Or Go Negative

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3 Reasons Interest Rates Will Stay Low Or Go Negative by Tony Sagami, Mauldin Economics

How long will interest rates stay low?

I expect the Fed to keep rates very low for a long, long time. After it raised rates in December, the Fed made it clear that future hikes will be gradual and data dependent. Apparently, the central bank hasn’t changed its position:

“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.“

The US’ economic reality hasn’t really changed since the first hike. We aren’t even close to the Fed’s inflation target-not to mention Yellen’s other ambitions.

Overall, here are the 3 main reasons why I think the Fed won’t lift rates anytime soon.

Interest Rates Will Stay Low Or Go Negative – Reason #1: No Inflation

Before the Federal Reserve lifts interest rates further, it needs to see clear signs that inflation will hit its 2% target. However, cheap energy and falling commodity prices have kept inflation extremely low, and that isn’t going to change anytime soon.

The Fed will wait for “further improvement in labor market conditions and a return to 2 percent inflation” to go further with interest rates.

Reason #2: No Economic Recovery

The reason a central bank raises interest rates is to slow an overheating economy. Yet we have only scant signs of economic growth, much less overheating.

Example: The Fed’s March report on industrial production showed a 0.5% drop in February after increasing 0.8% in January.

Reason #3: No Wage Growth

The US is a consumer-oriented economy, but American wages have been stagnant for years. In fact, adjusted for inflation, the average yearly wage for American workers has not increased since 1973.

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A big reason for the wage stagnation is the dramatic increase in employer-sponsored healthcare costs-while total compensation is rising, the take-home paychecks are not.

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Another round of QE is more likely

All of this will likely deter the Fed from raising rates any further.

I believe we’re much more likely to see another round of Quantitative Easing before we see a rate hike. John Williams of the San Francisco Fed hinted at this when he said the Fed could “clearly” lower rates again if needed, and use other tools “if necessary.”

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