Slow Growth for US Interest Rates

US Interest Rates Will Continue to Rise

So we expect a substantial depreciation premium on US interest rates.

Interest Rates

Back then, Europeans complained that low interest rates in America were driving global inflation now low US interest rates are blamed for driving irresponsible asset price booms.

When Interest Rates Rise

Today, the US Treasury can still borrow unlimited amounts at rock bottom interest rates.

But interest rates on US Treasury securities are very low and are not rising.

Within a couple years, interest rates on long term US Treasury notes could easily rise 3 4 , with interest rates on other governments paper rising as much, or more.

Nevertheless, the US is able to borrow at dramatically lower interest rates than Greece can.

There could also be strong pressure from the US Congress not to raise interest rates.

Inflation and interest rates in Japan lately have been even lower than in the US.

The Trouble With Interest Rates

Interest rates are already low.

But real interest rates did not fall enough, because nominal interest rates cannot go below zero.

The US Federal Reserve, for example, is aggressively cutting interest rates to forestall a possible recession.

In the US, demand has not recovered, despite almost three years of near zero interest rates.

This would drive up interest rates in the US and, ultimately, could trigger the dollar s collapse.

Bondholders gain when interest rates fall.

Yet international interest rates are rising.

This enabled US banks to profit by offering low rates of return to foreign lenders while forcing foreign borrowers to accept high interest rates.

The US is not the only country with very low or negative real long term interest rates.

It also lowered long term interest rates in the US and made monetary conditions there more expansionary.

Does that mean that these developing countries should raise their interest rates far more than the US?

Central banks respond to lowered demand by reducing interest rates and to higher expected inflation by raising interest rates.

This means that real interest rates interest rates measured in terms of goods and services have stayed the same.

If it falls 40 against the yen sometime in the next ten years, US long term interest rates should be four percentage points higher than Japanese rates. If it falls 60 against China s currency, the yuan, sometime in the next ten years, US long term interest rates should be six percentage points higher than Chinese rates.

The Long Mystery of Low Interest Rates

Low interest rates caused a housing bubble.

Yet financial markets are not pricing dollar depreciation and a rise in long term US interest rates accordingly.

However dubious Bush s actions may have been on both counts, interest rates on US public debt actually fell.

6. Use of selective nominal interest rates in such a way that interest rates on loans for speculative activities would be greater than the rates on loans for productive activities, and resulting weighted real interest rates for savings would be positive.

Because the US Federal Reserve and other central banks have driven their short term interest rates close to zero, they cannot lower rates further in order to prevent deflation from raising the real rate of interest.

Even when we look at core inflation, real interest rates in the US are still deep in negative territory.

First, while the US Federal Reserve continued hiking short term interest rates, long terms rates did not increase in tandem, which allowed housing prices to continue rising.

Do Low Interest Rates Ensure High Asset Prices?

Interest rates on government debt are still low.

Mortgages are available at outrageously high interest rates.

Interest rates on government bonds were racing upward.

In Brazil, interest rates remain close to 11 .

Both were reluctant to lower interest rates markedly.

Low interest rates did not cause the bubbles.

The US can finance these deficits in the short term in fact, interest rates on US Treasuries have recently fallen to record low levels.

Remarkably, as short term interest rates rose, medium and long term interest rates did not, something that was referred to as a conundrum.

An expectation that interest rates will be high sometime in the next decade should mean high interest rates on long term bonds today.