18/06/2017
“Interest Rates – Where to?
Reserve Banks around the world are forcing up rates. They’re doing that even when the inflation data is flat or negative. Why so?
That’s a very good question and one that isn’t being asked by many of the commentators. When interest rates go up there are winners and losers so the question has to be, “what people or institutions are winning due to the behaviour of Reserve Banks right now?” No one has asked that question!
In Australia the growing gap between RBA and bank rates means the bank are increasing their margins significantly and making more and more profit. That’s great news if you’re a bank CEO looking at your next million dollar bonus. This latest rise by the US Fed is likely to be a great excuse for our Australian banks to cry poor and lift rate here. My estimate is that’ll happen within a week. I can just hear the CEOs lamenting the difficult decision to slap Australians with a rate rise. However, if you have money in the bank you’ll be happy with an increase in interest. That’s if deposit rate are lifted as well.
The attached article highlights the issue well but doesn’t give answers. However, it doesn’t bode well for the future. Low, no or negative inflation eventually leads to a recession or depression. For people and businesses with debt the “depression” sets in pretty quick when loan repayments increase.
My advice, pay down debt as fast as you can and make sure you save some of your income. Everyone needs a contingency fund and people are usually a lot happier if they have a bit of money left over/in reserve.
“God Bless America”
Happy Reading
US Fed’s errors ‘unforgivable’: Standard Life Investments
Central bankers have consistently overestimated underlying inflation since the GFC, which could mean low growth is locked in “for good”, says Standard Life Investments.
BY TIM STEWART
Friday, 16 June 2017
Yesterday, the US Federal Reserve (the Fed) raised the official interest rate by 25 basis points and announced it would begin reducing its US$4.5 trillion balance sheet.
In her statement accompanying the announcement, Fed chair Janet Yellen indicated the bank would ignore a dip in inflation data, labelling it as "noisy".
But for Standard Life Investments (SLI), the Fed's predictions about underlying inflation pressures have been poor ever since the GFC, and constitute an "own goal".
"The least forgivable of these [own goals] has arguably been the consistent tendency [of western central bankers] to overestimate the underlying inflation pressures in economies," said SLI in an economic note.
The Fed overestimated underlying inflation in the US economy in 2013, 2014 and 2016, said SLI. "Only at the start of 2015 when the oil shock was at its peak and the dollar had appreciated close to 20 per cent over the previous two years, did officials gauge the inflation outlook correctly," said the note.
"The Fed has not been the only central bank to make these errors. The [Swedish] Riksbank, RBNZ, RBA, ECB and BoJ have also all had to downgrade overly ambitious inflation forecasts over recent years."
Because of central bankers' "misunderstanding of inflation", monetary policy has been too tight and real interest rates too high since the GFC, said SLI.
"It has also undermined private agents' faith in the ability and intent of central banks to meet their inflation objectives at all, with low inflation expectations becoming increasingly embedded in the pricing of government bonds and wage-setting decisions," SLI said.
"With the risks to most central banks' inflation forecasts still to the downside, they face important tests over the coming months; learn the lessons of the recent past and proceed even more slowly, or press on regardless and risk locking in low inflation for good."
