It Could Be A Long Time Before Interest Rates Are ‘Normalized’

Posted by: : Paul EbelingPosted on: April 21, 2015 It Could Be A Long Time Before Interest Rates Are 'Normalized'

It Could Be A Long Time Before Interest Rates Are ‘Normalized’

Participants in securities markets are betting the US Fed will not raise interest rates in June, but The Big Q is: Will the Fed ever be able to raise interest rates again?

Fed officials are debating whether recent economic weakness; flagging industrial production, housing starts and jobs gains are temporary or will the economy continue to be a disappointment

Falling Crude Oil prices, and a not spending consumer took its toll on US Q-1 growth. Overall consumers are saving, not spending

It is important to know that the US contingent labor force of 7-M men ages 25 to 54 not holding a job or looking for work, nor are they counted in the official unemployment rate limits wage gains and breeds uncertainty.

Stagnation in Europe and Japan, plus some slowing growth in China prompted foreign central bankers to print lots of paper money, and depress the values of the EUR and JPY. That makes foreign products even cheaper on store shelves and US exports too expensive to sustain both market share and profit overseas.

Fed officials can argue about whether these forces are temporary or permanent, but capital for use in the private sector is in great abundance around the world, as cash-rich corporations are buying back stock and making major acquisitions.

If the Fed pushes up interest rates on US  government securities that would push up rates on state and foreign sovereign debt. Nations recovering from bailouts like Italy and Spain could quickly become ‘hard’ cases like Greece.

If the Fed pushes up interest rates, it risks pushing business start up activity abroad.

Many American entrepreneurs will find it more profitable to organize their companies in Ireland, Japan and China where private capital would be abundant and cheaper than in the United States.

Already, inflation is near Zero and negative interest rates have emerged on government bonds and large company bank deposits are emerging in more stable and stronger European jurisdictions, and those may well stay negative for a long time notes one economist.

Economists complain that Zero inflation and deflation will discourage spending as cautious consumers to hold out for lower prices, but not if banks start charging interest to hold their money.

In a modern economy, Cash is inconvenient.

Credit card bills, mortgages and most family expenses cannot be paid with Bucks, and corporations cannot pay suppliers, workers or just about anything else with ‘green money’ either.

If prices start heading South, banks will be in a strong position to charge negative interest rates to regular consumers for holding their cash, because like corporations they need bank deposits to pay bills in an era when only electronic transfers and checks are practical for settling with most vendors and workers.

The Fed may find that it may like higher interest rates and encourage moderate inflation, but such notions are now outdated and outmoded.

Stay tuned…


Paul Ebeling

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Paul Ebeling

Pattern Recognition Analyst, equities, commodities, forex
Paul Ebeling is best known for his work as writer and publisher of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly-regarded, weekly financial market letter, where he enjoys an international audience among opinion makers, business leaders, and respected organizations. Something of a pioneer in online stock market and commodities discussion and analysis, Ebeling has been online since 1994. He has studied and worked in the global financial and stock markets since 1984.

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