So where will US interest rates go: Up or flat?
This is obviously a big big question but here are a few thoughts:
Firstly, the US government has a lot of debt. There is so much debt (on and off balance sheet) that raising interest rates substantially would be suicidal. Why make life difficult for yourself?
The other thing is that the US housing market is still relatively weak. This is a problem because housing equity drives consumer spending. Previously you had Fannie Mae and Freddie Mac pumping mortgage credit into the economy, so even when policy rates increased the housing market actually had more credit. Not to mention the financial innovation and structured credit which poured oil over the fire. Keeping rates low (especially the yield for 10 year treasuries) would help the housing market stabilise.
Some argue that that US economy is recovering and GDP growth is springing back. Well, is it? True that unemployment is stabilising, but that just means that the firings are over. What we need to see is hiring coming back, but we’re not really seeing that as corporates are still cautious about the economic outlook. Is momentum in the economy so strong that the Fed needs to raise rates? Doesn’t look like it.
House price deflation is still a problem in the US, while commodity prices are rallying on the back of a weak dollar, excess liquidity in the financial markets and political instability. But does the Fed really mind if the dollar is weak? I almost think they are deliberately keeping it weak to help the economy. The dollar has already lost its characteristic as a safe heaven, as seen during the recent instability in the Middle East / Africa.
So, overall, still makes sense for US rates to stay relatively low.
This article originally appeared here: US rates: Up or flat?
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