The Fed Interest Rate Level That Cripples Economic Growth Is Getting Lower And Lower
This means a number of things for the markets, but among the notable side effects is that now, conventional wisdom says, we are finally facing the real countdown to the Fed's first interest rate increase.
During the market volatility seen during October, the market's expectations for the Fed's first interest rate hike got pushed out to the third quarter of next year from the second. Implying, basically, that the Fed will raise rates at its September 2015 meeting, not its June 2015 meeting.
But a big market theme over the last few years has been that the Fed will stay "lower for longer" when it does raise rates.
In our latest Most Important Charts in the World feature, Gerard Minack of Minack Advisors notes that the threshold for where interest rates risk pushing the US economy into recession has been falling over the last thirty years.
"The peak in the real Fed funds rate required to trigger recession has fallen in every cycle since the 1980s," Minack writes.
"This pattern reflects lower trend growth and rising leverage - both of which tend to reduce the 'neutral' policy rate. This pattern will continue, in my view."
And if the "peak" Fed funds rate that the market can tolerate has fallen, the Fed faces quite a pickle, as it might be damned if it does and damned if it doesn't.
"The peak in the real Fed funds rate required to trigger recession will likely make a new low. 1% real could cripple growth. Worse, if the peak in rates is so low, it will leave the Fed little room to battle the next downturn."
Though before the Fed faces the task of battling the next recession, it is likely to confront the specter of raising interest rates for the first time.
But does it really have anywhere to take them?
"Lower for longer" indeed.
Business Insider
- US buys 81 Soviet-era combat aircraft from Russia's ally costing on average less than $20,000 each, report says
- 2 states where home prices are falling because there are too many houses and not enough buyers
- A couple accidentally shipped their cat in an Amazon return package. It arrived safely 6 days later, hundreds of miles away.
- Markets rebound in early trade amid global rally, buying in ICICI Bank and Reliance
- Women in Leadership
- Rupee declines 5 paise to 83.43 against US dollar in early trade
- Election Commission issues notification for sixth phase of Lok Sabha polls
- 6 Coffee recipes you should try this summer