The Fed and Interest Rates

The Lehmann Letter (SM)

The Federal Reserve raised interest rates recently and indicated – all things being equal – that it would continue to raise rates.

But that was before the recent stock-market drop and global fears of recession. The European Central Bank, for instance, yesterday vowed to reduce rates in March should recessionary forces continue.

Those concerns led to this posting yesterday by Tom Fairless and Jon Hilsenrath on The Wall Street Journal’s web site:

“Economic Unease Puts Top Central Bankers Under Renewed Pressure”

http://www.wsj.com/articles/economic-unease-puts-top-central-bankers-under-renewed-pressure-1453415366

The story began:

“Central banks in the U.S., Europe and Japan face renewed pressure to keep interest rates low or expand easy-money policies in response to gyrating stock markets, tumbling oil prices and slow growth in China and elsewhere…..”

So there’s a tug-of-war between those who may continue to advocate rate increases and those who now advocate reductions.

But those who advocate reduced rates in the U.S. have a problem. Since rates remain low despite rates’ recent step up, rates can’t fall far. Interest rates remained depressed for so long, they really can’t be depressed much further. That limits the maneuverability of those advocating rate reductions to stimulate demand.

 Questions or comments? Contact Mike Lehmann at lehmannm@usfca.edu.

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© 2016 Michael B. Lehmann