• 49
  • 18
  • Favorite

The Fed won't raise rates for years. Here's why that might be a bad thing

Dow Jones2021-03-25

In this analysis, from BCA Research, the central bank suppresses inflation for some time, then lets it run

Has the Federal Reserve painted itself into a corner?

By keeping interest rates so low for so long and buying up so many bonds to boost the economy, the central bank has caused asset prices to spike , critics say.

Now, many fear that any attempt to tighten monetary policy will rattle markets and the economy.

In order to avoid that, the Fed will keep policy extremely easy for some time to come, which will ultimately culminate in an inflation spike in the middle of the decade, according to a report out Friday from BCA Research.

As the report notes, the Fed has steadily pared its estimate of the neutral rate of interest, which is the interest rate that would prevail in an economy with stable inflation and full employment. Most Fed officials expect to make no interest rate increases through 2023 .

There are lots of reasons the long-term neutral rate has declined over time, , an economy that's increasingly services-heavy and manufacturing and capital-light, and slower growth overall.

But the BCA analysts expect things to change. The neutral rate of interest is determined, in large part, by the supply and demand for savings. And baby boomers are retiring, changing from savers to spenders--just as trillions of dollars more of government spending hits the economy.

If the Fed were to start raising interest rates in the next few years, "what had previously been a virtuous fiscal circle would become a vicious one," the BCA team wrote. "Needless to say, governments would resist such an outcome. Faced with the prospect of having to reallocate tax revenue from social programs to bondholders, politicians would put political pressure on central banks to refrain from raising rates. Central banks would probably oblige, at least initially. By keeping interest rates below their equilibrium level, central banks could engineer higher inflation."

It's worth noting that the question of higher inflation isn't semantic: investors have gotten a small taste of what a regime change like that could mean over the past few weeks as climbing bond yieldshave sparked a stock selloff .

There are pluses and minuses to a higher-rate economy, BCA writes. Rising inflation means real rates would fall, which would help borrowers. BCA imagines an activist central bank responding to such a dynamic: "Once enough debt had been inflated away, central banks could bring interest rates to their equilibrium level," the analysts write.

"In the end, bondholders would suffer while borrowers would prosper."

For now, that's on the horizon, they conclude. "The Goldilocks environment for risk assets -- where growth is strong, inflation is contained , and monetary policy is accommodative -- will last another two years. Investors operating on a 12-month horizon should continue to favor stocks over bonds."

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Report

Comment18

  • Seowting
    ·2021-03-25
    Hmm
    Reply
    Report
    Fold Replies
    • Seowting
      [真香]
      2021-03-25
      Reply
      Report
    • Seowting
      ??
      2021-03-25
      Reply
      Report
  • Tchua
    ·2021-03-25
    Inflation is here to stay
    Reply
    Report
    Fold Replies
    • rosemary2288
      buying gold
      2021-03-25
      Reply
      Report
    • Tchua
      Is anyone doing Anything?
      2021-03-25
      Reply
      Report
  • Razak
    ·2021-03-25
    Thanks for sharing
    Reply
    Report
  • ALi_BaBa
    ·2021-03-25
    Hi
    Reply
    Report
    Fold Replies
    • ALi_BaBa
      Hi
      2021-03-25
      Reply
      Report
  • wc77
    ·2021-03-25
    wow
    Reply
    Report
    Fold Replies
    • wc77
      pls like and comment! thanks
      2021-03-25
      Reply
      Report
  • IceColdFist
    ·2021-03-25
    [財迷] [財迷] [財迷] 
    Reply
    Report
  • Zarkness
    ·2021-03-25
    Haha good they say bad they say. So what do u think is good or bad? Comment below ok thanks. ?
    Reply
    Report
  • Andr3
    ·2021-03-25
    Post
    Reply
    Report
  • StansenSG
    ·2021-03-25
    Please like and reply comment. Thanks 
    Reply
    Report
    Fold Replies
    • ianch
      Done. Pls like/reply to my comment thks.
      2021-03-25
      Reply
      Report
  • Fumiyo
    ·2021-03-25
    Like n comment pls
    Reply
    Report
    Fold Replies
    • ianch
      Done. Pls like/reply to my comment thks.
      2021-03-25
      Reply
      Report
  • 3SPY
    ·2021-03-25
    Like and comment pls, thank you
    Reply
    Report
    Fold Replies
    • alexteoh90
      please comment on my post. tq!
      2021-03-25
      Reply
      Report
    • alexteoh90
      cool! commented
      2021-03-25
      Reply
      Report
    • 627ac981
      Sure Respond pls
      2021-03-25
      Reply
      Report
    View more 2 comments
  • redbean
    ·2021-03-25
    interesting read!
    Reply
    Report
    Fold Replies
  • reyreyjr
    ·2021-03-25
    like and comment i return the favour
    Reply
    Report
    Fold Replies
    • redbean
      ??
      2021-03-25
      Reply
      Report
    • 3SPY
      Response to this comment pls, Thank you
      2021-03-25
      Reply
      Report
    • Allvinnnn
      Me too
      2021-03-25
      Reply
      Report
  • Pat07
    ·2021-03-25
    Like and comment pls
    Reply
    Report
    Fold Replies
    • Huathk
      Gd
      2021-03-25
      Reply
      Report
    • 3SPY
      Response to this comment pls, Thank you
      2021-03-25
      Reply
      Report
  • Geniex
    ·2021-03-25
    Please help to comment and like 
    Reply
    Report
    Fold Replies
    • Geniex
      [开心]
      2021-03-25
      Reply
      Report
    • 3SPY
      Response to this comment pls, Thank you
      2021-03-25
      Reply
      Report
    • reyreyjr
      ks
      2021-03-25
      Reply
      Report
  • Geniex
    ·2021-03-25
    [開心] [開心] [開心] 
    Reply
    Report
    Fold Replies
    • Geniex
      [开心]
      2021-03-25
      Reply
      Report
    • reyreyjr
      reply to this thx
      2021-03-25
      Reply
      Report
  • fortuna
    ·2021-03-25
    Please like and comment
    Reply
    Report
    Fold Replies
    • reyreyjr
      reply to this thx
      2021-03-25
      Reply
      Report
    • 3SPY
      Response to this comment pls, Thank you
      2021-03-25
      Reply
      Report
  • Rep
    ·2021-03-25
    like and comment plox
    Reply
    Report
    Fold Replies
    • Rep
      hi
      2021-03-25
      Reply
      Report
    • fortuna
      Done
      2021-03-25
      Reply
      Report
    • reyreyjr
      reply to this thx
      2021-03-25
      Reply
      Report
 
 
 
 

Most Discussed

 
 
 
 
 

7x24

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Company: TTMF Limited. Tech supported by Xiangshang Yixin.

Email:uservice@ttm.financial