Wall Street Journal
headline, ‘WSJ Poll Finds Widespread Economic Anxiety’, is typical of the prevailing mood among North America’s senior executives, said Christopher Rupkey, chief financial economist for the Bank of Tokyo-Mitsubishi UBJ.
The session at which he spoke was titled ‘The Dangers of Too-low Interest Rates’ and Rupkey said that the longer the US Federal Reserve’s delay in raising short-term interest rates – which have remained at an all-time historic low for nearly six years – the greater the risk that they would permanently affect the way that Americans save, spend and invest. Nor would this be in a good way.
He contrasted the current low-rate era with the milder recession of 1992, when rates were held down at 3% for a time and 2003, when the-then Federal Reserve chairman, Alan Greenspan, kept them at 1% for a year – a move that helped spark the ensuing boom and bust in the US property market.
However, Rupkey noted that the current period was unsurpassed and markets “weren’t buying the message” that rates would have to start rising in the near future. According to the Federal Reserve, the Fed funds rate will have edged up to 1.5% by the end of next year and will subsequently rise to 3.0% by the end of 2016 and 3.75% by the end of 2017.
Yet many of the comments made by the Fed’s new chair, Janet Yellen, since taking office make it clear why the markets remain unconvinced. “The economy still feels like a recession to many Americans and it also looks that way in some economic statistics,” said Yellen at the end of March this year.
The American public were indeed pessimistic on wages and unemployment, said Rupkey, although inflation remained relatively low and the economy had steadily generated new jobs, bringing the US unemployment rate down to below 6% ahead of the Fed’s expectations.
According to Rupkey, who supported his theory with other relatively upbeat statistics, the Fed apparently has decided to exaggerate how bad the state of the American economy still is. Voters might well be frustrated by income inequality and wage stagnation but both largely lie outside the Fed’s remit in any case.
“Perhaps the real danger is that the Fed hasn’t yet reset its policy as we come out of recession,” said Rupkey, who doesn’t believe that Us economy is likely to fall back into recession in the foreseeable future, despite the flattering performance of many eurozone economies.
His own view is that, belatedly, having finally completed the “water torture” that was its slow abandonment of quantitative easing (QE) in US$10bn increments, the Fed will begin raising rates next March. It will probably introduce a 25 basis points increase every couple of months.
As for the American consumer’s confidence, “consumers regularly say one thing, yet do something else,” said Rupkey. “They answer surveys pessimistically, whereas the reality is actually quite bright”.
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