Could Rates be at Zero Until 2016?
The Wall Street Journal reported on an important speech from Minneapolis Fed President Narayana Kocherlakota. He said rates should stay low until unemployment is at 5.5%:
“NEW YORK–A Federal Reserve official on Thursday proposed that as long as inflation remains in check, the central bank should not raise rates until there has been a very substantial fall in unemployment.
Federal Reserve Bank of Minneapolis President Narayana Kocherlakota described a monetary-policy regime that would potentially leave short-term rates at effectively zero percent for years to come, most likely longer than the mid-2015 date central bankers currently suggest could bring the first increase in interest rates.
“As long as the FOMC is continuing to satisfy its price stability mandate, it should keep the Fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5%,” Mr. Kocherlakota said.”
What does that mean for interest rates? Well, it means the Fed’s current prediction of keeping rates low til 2015 might be optimistic. Using a simple trend analysis during this recovery we shouldn’t expect unemployment to hit 5.5% until mid-2016. That’s assuming that things don’t pick-up, of course or that we don’t experience a bump between now and then (which would make this an extremely long period between recessions). So get used to ZIRP. It’s here to stay. Whether Kocherlakota is right or wrong.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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31 Comments
ZIRP isn’t going to make American workers cheaper than foreign ones.
Absolutely not.
But even if low-wage workers had their wages increased and exchange rates were restored to where they should be .. there’s automation.
Even China is robotizing now. And workers will never be cheaper than robots.
http://www.nytimes.com/2012/08/19/business/new-wave-of-adept-robots-is-changing-global-industry.html?pagewanted=all
There are interesting times ahead. How long can we invent more make-work to compensate?
This would be very bullish for gold and treasuries, right? Any thoughts here?
I think it depends upon the rate of inflation. Gold typically does well when the rate of inflation is greater than short term T-bill rates.
Is he living in the real world, talking to business owners, CEO’s the unemployed. Is he examining the guts of the machinery, vs just sitting at the steering wheel wondering why the car wont move. I’ll just floor it longer, that should get it moving 10 mph.
Makes you wonder.
Once the words of the giants of the past are forgotten the way to destructions is paved.
Lenin is said to have declared that the best way to destroy the Capitalist System was to debaunch the currency. By continuing a process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…while the process impoverishes many, it actually enriches some…Lenin was certainly right…The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
John Maynard Keynes
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered…I believe that banking institutions are more dangerous to our liberties than standing armies… The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
Thomas Jefferson
How is the JMK quote even relevant? NK is clearly talking about a period when inflation is low.
It seems like a historic American balance has been between the Hamiltonian and the Jeffersonian.
For decades, if not a century or more, it seems as though the balance has tipped in favor of the Hamiltonian.
If this the case, restoring the balance may require major structural changes.
the US needed two bubbles (new economy, real estate) to keep unemployment around 5% in a world where jobs in developed countries are being threatened by globalization and rising productivity.
and unlike in Europe there is no potential for further job market reforms.
7-8% might very well be the true potential. but it will take time to acknowledge that.
Maybe the formula that low interest rates = job growth should be reconsidered.
Agreed. Perhaps US policies regarding corporate taxation and global trade have more to due with our unemployment issues?
Check this out
http://abcnews.go.com/WNT/video/us-bridges-roads-built-chinese-firms-14594513?tab=9482930?ion=1206853&playlist=14594944
“Low interest rates = job growth” only holds true if there is opportunity for investment in more productivity.
But we’re hugely productive already.
Our economic system is designed for a time where more work getting done pretty much automatically boosted sales. We need a system that matches our current reality: more demand boost sales.
Sure there’s still things to invest in – new technologies or products replacing old ones. But that’s a zero sum game. The old ones simply get squeezed out of the market. Think flatscreens vs CRTs. Think Internet vs postal service.
Or perhaps I mis-stated. I’m not so bloody sure we need “more sales”.
Do we really need production growth at this point?
The point is probably better stated as mal-investment in offshore accounts leading to decaying demand.
Quoting Henry Ford: “There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible.”
Too many have forgotten why the last point is important.
What the Fed is basically saying is the days of earning 4% risk free returns are over. If you want to earn a return you going to have to do it the old fashion way-invest in a production/job inducing enterprise or let your money decay.
Well, that’s what supposed to happen….or you could put your money into another asset bubble (which is what will happen)
some might say that bubble creation/burst comes with the territory of capitalism
Assuming a lag between a recovering GDP and lower unemployment, it seems likely that GDP would have to start growing at around 4% before unemployment starts to come down. If so, then inflation would be a HUGE problem with 4% growth and a ZIRP.
Would a Bernanke led Fed have the guts to raise interest rates just as unemployment is starting to come down? Or will they let the inflation genie out of the bottle? Either way, next stop is stagflation.
Rates will be at zero in 2016, 2026 and possibly 2036.
The FED doesn’t determine interest rates, “Mr. Market” does.
1) The FED certainly determines short-term rates by setting the FFR and the IOER, and through Open Market Operations.
2) Longer-term rates are mainly a function of shorter-term ones
3) Ergo, the Fed basically determines interest rates on Treasury securities across the curve.
Right, Geoff. And if they wanted to set longer rates then they could do that also.
Not to mention that the Fed has been buying up almost all the new long treasury issuance through QE and OT. Forget China, the Fed is now the largest holder of Treasury securities in the world.
China should never have been brought up in this context. They only bought securities on the open market because they felt like it, not because the US needed them to.
He may be targeting the wrong metric, since the unemployment rate may end up dropping to 5.5% due to the massive number of people leaving the workforce…
That’s a fascinating thought. Wouldn’t it be interesting if the current economic malaise just turned out to be a byproduct of the boomers getting older — producing less, consuming less, running out of money and energy, and costing more (health care.)
Some have said that boomer demographics explained the boom in the 80s and 90s.
Riffing on your point, I know several professions in which the boomer retirement will open the door for younger people — teachers, for example, as well as financial advisors.
Naaah, you need to go looking at globalization and automation.
The proof lies in the resulting 21 trillion USD in offshore accounts, 5 trillion in liquid assets in bigcorps, and 10,15,20 (depending on who you ask) in the shadow banking system.
To put it in perspective, US GDP 16 trillion. Which means there’s about a 10th of that money doing the actual consumption-production dance in the everyday economy.
1.6 trillion in the circulation, meet 31+ trillion NOT circulating anymore.
Keeping interest rates low will not stop inflation. As long as the Fed increases the number of USD in circulation inflation will keep building and we will be paying more for food and gas which government doesn’t count in the core CPI. Any apparent economic improvement will mollify some of the sheeple who plan to vote in November. And, projecting low interest rates into 2015 does not make me feel amy better about the prospect of the US loosing its sovereignty in favor of a New World Order.
I agree with Johnny Evers, i.e. “Maybe the formula that low interest rates = job growth should be reconsidered.”
Word
Looking at the graph, I notice that the projected decline in unemployment is faster than the decline during the IT boom.
Is there a believable real-world explanation for that?
Put another way: 2016 is probably optimistic, too.