There’s a “real” possibility interest rates could return to near-zero!

 By Ray Birch

PLANO, Texas—Following the release of a new Federal Reserve paper suggesting there’s a “real” possibility interest rates could return to near-zero in the coming years, at least one economist is pushing back—calling that scenario unlikely.

As CUToday.info reported, the paper—jointly published by the New York and San Francisco Fed—notes that while the risk of a return to ultra-low rates is currently at the lower end of its range over the past 15 years, it still “remains significant over the medium to long term.” The authors cite ongoing high levels of economic uncertainty as a key factor.

i-Stock-Pavel Muravev

Brian Turner, president and chief economist at Meridian Economics, did not agree with the Fed’s perspective.

“What has to happen for the Federal Open Market Committee to fear an economic threat that equals the past four events to send their overnight benchmark target to a near-zero level?” Turner asked. “Here’s the dilemma. We are still dealing with growth and inflation. If the FOMC keeps its rate relatively high for too long a period of time, it will have an adverse impact on growth—possibly leading to negative growth. But if they drop the benchmark rate too much, too soon, they will ignite another hyper-inflation period that could possibly be more damaging than the 2021-2024 disaster.”

Turner also pointed out the political battle brewing between President Trump and Fed Chairman Jerome Powell that could easily impact what the FOMC does with its fed funds guideline.

“Keeping in mind that the only rate the FOMC has the authority to set is the nation’s discount rate, their fed funds standard is a simple guide that banks use to lend to one another. So, notwithstanding an FOMC decision, the nation’s bankers might take the lead—but doubtful.”

Turner said he believes the fear of hyper-inflation is greater than the possible impact lowering rates might have on future economic growth.

Brian Turner

“The economy can sustain consumer spending growing between 1.5% to 2.5% all the while fed funds remaining between 4.0% to 4.5%,” he said. “Upward inflation pressure is stable now but could easily advance beyond our current 2.4%, to has high as 3.2%—far above the 2% threshold policymakers have kept in mind for some time—if the FOMC mistakenly moves too much, too soon.

“Therefore, I believe that while there is room to drop the overnight benchmark another 50 basis points without adversely impacting economic inflation and stable growth, I do not believe that a ‘near-zero’ offering is in play, short of a major global disruption or national emergency,” Turner concluded.

What Turner sees happening is pricing spreads starting to narrow whereby most rates on credit products—vehicle loans, mortgage loans, credit cards etc.—starting to decline more rapidly.

“And with liquidity profiles having improved over the past year or so, there will be less pressure on term certificate rates, particularly on the promotional rates that still exist in many markets,” he explained. “But that is less a factor of fed funds and mostly due to stronger liquidity and a desire to lower cost of funds.”