Monetary Policy

How Long Can Interest Rates Stay Low?

When a central bank lifts interest rate targets by 0.5% it expects households and firms to respond. In a crisis, the official target may fall by 3% in order to shock the economy into a positive response. These movements of interest rates by the central bank are an important tool of macroeconomic adjustment.

They are also relative to the longer term, or normal rate of interest in the economy. What is interesting now is that rates have been low for quite a long time suggesting the natural rate of interest in the economy has fallen permanently.

Ask the Experts about the U.S. Fed Rate Hike Decision

Three, two, one, liftoff!

Alex Nikolsko-Rzhevskyy, Lehigh University

It finally happened: the nine-year-long spell of near-zero interest rates came to a logical end. The Fed raised its funds rate target in the first step toward normalizing US monetary policy.

Was this decision justified? Yes, for many reasons.

Fed Chair Janet Yellen has been gradually preparing markets for a hike for a long time, leaving today’s decision in little doubt: only about 15% of traders didn’t think it was coming.

Japan's Central Bank Tweaks its Monetary Policy

The Bank of Japan was the fourth major central bank to meet this week.  Sweden and Norway kept policy unchanged.  The Fed hiked.  There was no expectation that the BOJ would do anything.  Governor Kuroda surprised the market with largely operational tweaks to what Japan calls Qualitative and Quantitative Easing.

Initially, and perhaps with the help of headline reading algos, the yen sold off and Japanese shares rallied.  As cooler, or perhaps human, heads prevailed, the markets reversed. 

The Sky Did Not Fall

Asia extended the US dollar's post-Fed gains while Europe has seemed content to consolidate the move, perhaps waiting for US leadership.

A Dovish Interest Rate Hike?

For the first time in 9 years, the Federal Reserve has raised interest rates in a move that could make many loans more expensive for companies and Americans.  Speaking today in Washington D.C., Federal Reserve Janet Yellen discussed the Federal Open Market Committee’s decision to raise its Federal funds rate target 25 basis points, making a new target range of 0.25 to 0.5%.

The Greenspan Conundrum

There are many investors and observers who do not think the Fed ought to raise interest rates today.  The Fed's targeted inflation measure, the core PCE deflator, stood at 1.3%, well below the 2% target.

They see the fresh sell-off in oil prices and are more concerned disinflation than inflation.  Over the past week or so, more concern has been expressed about the sell-off in the high yield bond market. 

Fed Day: Not Tight, Just Less Easy

The much-awaited Fed meeting is here.  A 25 bp increase in the Fed funds range to 25-50 bp is widely expected.  The near certainty of this contrasts to the high uncertainty of the immediate impact stocks, bonds, and the dollar.  There are five components of the Fed's decision that will command attention.

Consequences of Setting Such a Low Interest Rate Bar

With the US Federal Reserve seemingly set on raising interest rates, it is time to take stock of what low rates have done for the world. In addition, what the prospects are when this era of low interest rates ends.

Since the financial crisis, short-term interest rates have been close to zero in most major economies. The US Federal Reserve has held interests around 0.25% for the last seven years. Meanwhile, the UK’s bank rate remains at 0.5% and in Sweden the central bank has set a negative nominal rate.

The Fed Meets, but So Do Other Central Banks

The euro made marginal news highs near $1.1060 while sterling and the yen have been confined to yesterday's ranges.  European equities are bouncing off ten-week lows.   The dollar-bloc is firm; the upbeat RBA meetings provided only a short-lived fillip higher.  Oil prices are steady to firmer after yesterday's recovery. 

From the Mind of Mersch

Investors, fellow central bankers, and the media continue to try to make sense of last week's ECB surprise.  We had argued that given the market positioning, especially the dramatic accumulation of speculative short euro positions since the middle of October that the market was prone to a correction.