As expected, low rates for as far as the eye can see

It wasn’t expected by everyone, but MMs have been predicting this for quite some time (although they are even lower than I expected):

World markets may have recovered their poise from a torrid start to the year, but their outlook for global growth and inflation is now so bleak they are betting on developed world interest rates remaining near zero for up to another decade.

Even though the U.S. Federal Reserve has already started what it expects will be a series of interest rate rises, markets appear to have bought into a “secular stagnation” thesis floated by former U.S. Treasury Secretary Larry Summers.

Of course Summers was a latecomer to this idea; I’ve been talking about slower trend growth and low interest rates as the new normal for many years.  Tyler Cowen’s book entitled “The Great Stagnation” also preceded Summers.

If you believe the press (and many economists), this period of low interest rates represents “easy money”,  That’s right, the implied claim is that the “liquidity effect” (normally very transitory) has now lasted for a decade. And there’s more to come:

Take overnight interest rate swaps. They imply European Central Bank policy rates won’t get back above 0.5 percent for around 13 years and aren’t even expected to be much above 1 percent for at least 60 years.

Japan‘s main interest rate won’t reach 0.5 percent for at least 30 years, they suggest, and even U.S. and UK rates are set to remain low for years. It will be six years before U.S. rates return to 1 percent, and a decade until UK rates reach that level.

“Although interest rates are low, they’re not accommodative,” said Harvinder Sian, global rates strategist at Citi in London. “The era of zero rates will be with us for years and years, it wouldn’t surprise me if we’re looking at another five to 10 years.”

Sixty more years!?!?!  At least there is one guy dissenting from the view that low rates mean easy money.  It will be interesting to see how long it takes the others to figure this out.  Let’s hope it’s not 60 years.

Update:  Commenter BC pointed out that the US interest rate data looks fishy, given that 5 year T-notes currently yield well over 1%.  So the article I cited may not be accurate.

And as predicted by MMs, the Swiss decision to revalue the franc has backfired. Now that markets understand that the Swiss are willing to let the SF appreciate over time, Swiss interest rates are forced below the already very low eurozone rates (due to the interest parity condition.)  In contrast, the Danes fought the speculators off, and are now reaping the (admittedly small) benefits, of having slightly higher bond yields than Germany:

The five countries or economic blocs currently with negative deposit rates have yields below zero on all their bonds from a minimum of five years’ maturity (Denmark) to a maximum of 20 years (Switzerland).

The pro-revaluation crowd thought that the SF would no longer be expected to appreciate, if speculators could be placated with a revaluation upwards.  But that was like feeding meat to sharks, it just increased their appetites.

PS.  Here’s what Tyler Cowen said 13 months ago, about the ability of the Danes to fight off speculators:

I would bet against them [the Danes], in any case this will be a neat test case for our judgments of Switzerland.

PPS.  Lars Christensen says the US may be about to enter a recession.  Possibly, but I’m less confident than he is.  BTW, here’s the track record of IMF economists in predicting downturns:

As The Economist noted, between 1999 and 2014, the International Monetary Fund, in its April forecasts, failed to predict every one of the 220 instances in which one of its members suffered negative annual growth in the next year.

Ouch!  I wonder if they ever predicted anyone will have negative growth?  Kudos to Lars for going out on a limb.

PPPS.  Tyler Watts sent me a music video on “Tall Paul” (Volcker), which might be fun to use in undergrad money/macro classes.

Update:  Timothy Lee has a great post on Draghi’s screw-up today.

 


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36 Responses to “As expected, low rates for as far as the eye can see”

  1. Gravatar of Chun Chun
    10. March 2016 at 18:27

    It’s not related but I have to ask: will you agree to replace central banking artificial intelligence?

  2. Gravatar of Chun Chun
    10. March 2016 at 18:28

    “Central banking by artificial intelligence”

  3. Gravatar of Matt Moore Matt Moore
    10. March 2016 at 18:30

    I’m personally surprised that IMF predictions of recession don’t of themselves cause recessions in small open economies.

    As you suggest, the number of predictions and the number of occurances is key.

    If there are a healthy number of predictions, that makes me vastly more optimistic about the state of macroeconomic management globally. Predicting recession is sufficient to avoid one.

  4. Gravatar of Matt Moore Matt Moore
    10. March 2016 at 18:32

    @Chun – one hardly needs AI to keep NGDP growing steadily. My phone could run the programme necessary to do that.

  5. Gravatar of ssumner ssumner
    10. March 2016 at 18:47

    Chun, I don’t know enough about AI to comment.

    Matt, I suspect there were almost no predictions of negative growth. If there were a lot, then they’d be almost certain to occasionally luck out and be correct.

  6. Gravatar of Ray Lopez Ray Lopez
    10. March 2016 at 20:05

    Strawman Sumner noted. Is Sumner of the opinion that prediction markets never change their predictions as time progresses? If markets say ’60 years’ today, they will say so forever?

    PS–see my prior post on sticky wages. I’ve rebutted all evidence from your readers on sticky wages. Where’s your evidence? The two central pillars of your MM theory are: money illusion and sticky prices/wages. Both are false. For example, as per the earlier thread, sticky wages have only been observed in all wage categories since the last 10-15 years says the paper Postkey cited from the St. Louis Fed. Before then, highly-educated workers had no sticky wages.

  7. Gravatar of Jerry Brown Jerry Brown
    10. March 2016 at 20:55

    Three posts in one day! Not sure it can be totally attributed to the ECB but they have apparently boosted output here. Seriously though, thank you.

    And Larry Summers does seem like a latecomer to me too. I am not sure why he should get as much cred as he does. Maybe he does in power-policy circles, but I haven’t seen anything so special about his econ views. Maybe that is just how it works in the economics profession? I am quite willing to be schooled on this if I am wrong.

  8. Gravatar of E. Harding E. Harding
    10. March 2016 at 21:07

    From the Econlog post:

    “and the GOP seems to want to kick millions of highly productive workers out of the country (which would lead to huge price increases for fruits and vegetables)”

    -LOL. There are highly productive immigrant workers. And there are immigrant workers who pick fruits and vegetables. Intersect, these do not.

    And the U.S. is only a tiny portion of the world agriculture market. Any price increase resulting from kicking out the illegals would be an agricultural protectionist own-goal.

    The rest of the criticisms in that post are good.

  9. Gravatar of bill bill
    11. March 2016 at 03:50

    I really don’t think anyone can predict how innovative or not we will be in the future. For monetary policy and fiscal policy, the answer is irrelevant. Monetary policy should deliver 5% NGPLT (or 4% – that can be argued) and fiscal policy should leave NGDP management to monetary policy. So thinking about secular stagnation can be interesting dinner talk, but it only distracts us in monetary policy discussions. Steady NGDP growth is probably the best setting for maximizing innovation and the potential for innovation is what it is.

  10. Gravatar of libertaer libertaer
    11. March 2016 at 04:25

    Good article by Timothy Lee, but listen to that:
    https://www.youtube.com/watch?v=tMH8vmjnHjw
    Go to 44:16

    For me this sounds like level targeting. So at least Draghi gets it. He just has to put it center stage.

  11. Gravatar of ssumner ssumner
    11. March 2016 at 05:24

    libertaer, Interesting, but if he’s serious he has a lot further to go. That could be interpreted many different ways.

    Has anything come out today in terms of commentary on that, which would give markets the impression that he was serious? This would be a revolutionary change in policy, and those things typically don’t happen quietly.

  12. Gravatar of ssumner ssumner
    11. March 2016 at 05:26

    Harding, When I went to Tucson last Christmas my hotel said they had no room for me, because immigration had raided and all their maids were gone. Now multiply that times 1000. Is your “global market” going to solve that problem?

  13. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    11. March 2016 at 07:46

    Europe is also going to have to face up to its supply side issues. Consider the plight of the poor socialist government of France, which is trying to take baby steps toward freeing up the labor market so young people can find work;

    http://abcnews.go.com/Politics/wireStory/french-protest-bill-tampering-35-hour-week-37520691

    ————–quote————–
    Several high schools across France were blocked off by students who set up barricades with garbage cans.

    Outside the Helene Boucher high school, students cheered any mention of how the movement would prevent Hollande and the government from passing the bill.

    Maryanne Gicquel, a spokeswoman for the FIDL student union, described young people’s journey toward a stable job as “a succession of internships and poorly-paid jobs.”

    “Now we’re being told that it will be easier for companies to lay off workers,” she said.
    ————-endquote———–

    Bien sur, when it’s easier to fire/lay off workers it’s also easier to hire them in the first place. Votants rationnel?

  14. Gravatar of James Alexander James Alexander
    11. March 2016 at 09:22

    Scott
    It is just second thoughts. I know you don’t like the concept but it is true today.
    http://www.bloomberg.com/news/articles/2016-03-10/asian-index-futures-signal-losses-after-ecb-as-euro-holds-gains

    The press conference was confusing and Draghi was unusually confusing and almost confused. The measures really are stronger than expected but not well explained.

    There was a second press conference yesterday at 4pm European time on some technical aspects of a ruling by the European Commission (not the ECB) about easing some of the toughness expected from some new capital rules. and banks have been leading the rally since the ECB announcement and today.
    http://www.bloomberg.com/news/articles/2016-03-11/coco-turmoil-force-europe-to-act-against-surprise-coupon-loss

  15. Gravatar of TravisV TravisV
    11. March 2016 at 09:42

    I was surprised to see this from Joe Weisenthal and others, rather disrespectful:

    https://twitter.com/thestalwart/status/708009743407779840?refsrc=email&s=11

    https://twitter.com/thestalwart/status/708010079132459009?refsrc=email&s=11

    Glad to see you and Timothy B. Lee had the last laugh!

  16. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    11. March 2016 at 09:57

    When down is up:

    http://www.telegraph.co.uk/personal-banking/mortgages/how-falling-interest-rates-could-mean-your-mortgage-bill-goes-up/

    ———–quote———–
    How could low or negative interest rates make mortgages more expensive?

    One answer, according to banking analysts, is that when rates fall to very low levels banks start to bear costs relating to the money they hold on deposit.

    In a negative rate environment, deposits present actual costs.

    It is difficult to pass these costs onto depositors.

    In fact very few banks, even in countries like Switzerland where negative rates have prevailed for some time, pass any cost directly to savers.

    Instead to protect their profits, banks have to increase the charges they levy upon borrowers.
    ————endquote———-

  17. Gravatar of Christian List Christian List
    11. March 2016 at 11:36

    @libertär

    To me this sounds like level targeting. So at least Draghi gets it. He just has to put it center stage.

    What does he get? He is clearly talking about the very usual inflation target. Where’s the hint to NGDP level targeting? There is none. You see things that aren’t there.

    The most interesting thing about this bit is the funny accent of the questioner that sounds a bit like a French and German accent combined.

  18. Gravatar of derivs derivs
    11. March 2016 at 13:13

    “At least there is one guy dissenting from the view that low rates mean easy money. It will be interesting to see how long it takes the others to figure this out. ”

    Yep, should be obvious, but I wouldn’t hold my breath.

  19. Gravatar of Tom Brown Tom Brown
    11. March 2016 at 14:18

    O/T: Scott, sorry about dropping IQ down again, but you might like this. I agree with her.

  20. Gravatar of James Alexander James Alexander
    11. March 2016 at 14:35

    There seems to have been a lot of public and private follow upon Friday from the ECB to reinforce their original, positively-taken, message.

    “The European Central Bank embarked on a rearguard action to win over skeptical investors on Friday, a day after chief Mario Draghi unveiled a new stimulus package but blunted its impact by suggesting the ECB would not cut interest rates again.

    A number of top ECB officials, both publicly and behind the scenes, spoke out in support of the measures Draghi announced on Thursday although some recognized the ECB had muddled its message to financial markets.”
    http://reut.rs/1U6EeID

  21. Gravatar of Gordon Gordon
    11. March 2016 at 14:55

    CNBC ran a poll today to determine who its audience sees as the most credible central banker.

    http://www.cnbc.com/2016/03/11/ebcs-draghi-feds-yellen-or-boes-carney-cast-your-vote-for-most-credible-central-banker.html

  22. Gravatar of Benjamin Cole Benjamin Cole
    11. March 2016 at 15:40

    There have been second-day rallies after the ECB policy meeting of Thursday. Delayed reaction? Draghi bumbling?

    Cut taxes and monetize tax revenues. If that does not work, great! You just engineered a way to cut taxes.

  23. Gravatar of Scott Sumner Scott Sumner
    11. March 2016 at 17:06

    Patrick, I’ve been meaning to do a post on France in the near future.

    James, I think you slightly misunderstood my position, I’ll do another post.

  24. Gravatar of Jim S. Jim S.
    11. March 2016 at 17:31

    Greg Mankiw’s blog has a song on the same topic, with a lighter approach.

  25. Gravatar of Benjamin Cole Benjamin Cole
    11. March 2016 at 18:54

    OT, but since Trump is a recurring theme:

    Okay, Trump rallies are being disrupted and now cancelled, due to the threat of violence. Somehow, this is presented as Trump-supporter intolerance on display.

    Really? Trump rallies are cancelled due to the threat of protestors, but is the Trumpers who are the bad guys?
    Trump does not have the right to give a speech in the USA? The USA has become a large and intolerant college campus? But it is the banned speakers who are the bad guys?

    Another funny one: Some protesters have disruptively chanted “Black Lives Matter” at Trump rallies. The crowd counter-chants with, “All Lives Matter.”

    No one has credited the Trump supporters with inclusivity, and what is actually a good sentiment. The Trump supporters did not respond with, “White Lives Matter,” for example.

    I am not so enamored of Trump. There are issues with his international trade stances, for example. He has made gratuitous derogatory statements about people illegally seeking work in the USA, while hiring the same. His hypocrisy towers above Mt. Everest, and nearly matches that of his rival candidates.

    But are barriers to free trade a larger economic structural impediment than ubiquitous property zoning, the near-universal criminalization of push-cart vending, or the $1 trillion-a-year “national security” complex?

    Why is free trade always an issue, but not property zoning or the criminalization of pushcart vending? We believe in free markets and free trade, but not in my (upscale) neighborhood?

    What is the real fear the GOP establishment has of Trump?

    There seems to be a very selective embrace of free markets by the chattering classes in America.

  26. Gravatar of Gary Anderson Gary Anderson
    11. March 2016 at 23:50

    Banks bet on low rates in swaps. Banks also don’t want their collateral exploding upward in yield and downward in value. That would mean they would need more collateral.

    The banks bet on low rates on long bonds, period. It is a rigged game.

  27. Gravatar of libertaer libertaer
    12. March 2016 at 04:52

    @Christian List
    “What does he get? He is clearly talking about the very usual inflation target. Where’s the hint to NGDP level targeting? There is none. You see things that aren’t there.”

    No, you see things I never wrote. I wrote that he gets level targeting, not NGDP targeting. But level targeting alone would be revolutionary. The question is, will Draghi act on this?

  28. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    12. March 2016 at 07:55

    ‘What is the real fear the GOP establishment has of Trump?’

    His 60% disapproval ratings in the polls. They fear he can’t win in November and will have negative coattails.

  29. Gravatar of BC BC
    12. March 2016 at 10:39

    “It will be six years before U.S. rates return to 1 percent”

    What is the basis for this statement? Fed Funds futures don’t go out that far. When this article was published on 3/9, 5-yr treasury yields were at 1.38%, and the 2-yr was at 0.89%. That implies a forward rate of 1.71% between years 2 to 5. (Is that 3yr 2yr forward or 2yr 3yr forward?). I know that there may be some duration risk premium in these rates but, even allowing for that, don’t these interest rates show that the market expects US rates to exceed 1% in much less than 5 yrs, more like 2-3 yrs?

  30. Gravatar of ssumner ssumner
    12. March 2016 at 14:03

    Ben, You said:

    “But are barriers to free trade a larger economic structural impediment than ubiquitous property zoning,”

    OK, what are his views on zoning? You do know that he has awful views on eminent domain, right? He believes that big developers like Trump should be able to take houses away from little old ladies, by force if necessary. Do you agree?

    He says Apple should be boycotted, because they are trying to protect our privacy. What are these other areas where Trump has good views, which offset his bad views? He also says no one is more militaristic than he is. Do you approve of that? Which are the wonderful Trump views?

    Patrick, I think it’s more than that, he doesn’t even have GOP views on economics. And he’s clearly attracting lots of KKK types to his cause, even if unintentionally. In some ways a Trump win would be an even bigger problem, as the Trumpites would take over the GOP, and turn it into France’s National Front. Lots of Republicans would switch to the Dems.

    BC, I thought that was fishy too, I should have double checked it. I’ll add an update.

  31. Gravatar of Christian List Christian List
    13. March 2016 at 08:12

    @libertär
    Thank you for explaning.

  32. Gravatar of Christian List Christian List
    13. March 2016 at 08:21


    turn it into France’s National Front. Lots of Republicans would switch to the Dems.

    The Front National is very left-wing in economic terms. They are way closer to Bernie Sanders than to the GOP.

    Trump is a business man who employs many immigrants. It’s hard to see why he would change any of that.

    It’s only about regulation and better deals, not about banning guest workers entirly. His clubs ins Florida are full of workers he flies in and out from elsewhere because Americans won’t do the job. But the flying out is part of the job. And it’s not even his idea. It’s the law in Florida alreay. How “evil”.

  33. Gravatar of Art Deco Art Deco
    13. March 2016 at 08:36

    because Americans won’t do the job.

    Snooze. Americans will do the job if (a) employers do not exclude them a priori and (b) you pay them the wages they can receive from other employers who are not availing themselves of a franchise to import workers from Central America. Go to my hometown and see who the orderlies, food service, and nurse’s aides are in the local nursing home: blacks, whose pedigree commonly extends back 7 or 8 generations in this country.

  34. Gravatar of Art Deco Art Deco
    13. March 2016 at 08:44

    He believes that big developers like Trump should be able to take houses away from little old ladies, by force if necessary. Do you agree?

    The little old lady in question was the married late-middle aged operator of a boarding house who had turned down seven-figure offers for her ratty property. Arguably, she should have a franchise to do that, but let’s not present her as something she wasn’t.

    While we’re on the subject of property rights and freedom of contract, what’s Hillary’s view on the franchise of bakers to refuse service to the cast of Glee? Let’s see Cowen and Tabarrok argue that one in the rathskellar on the GMU campus.

  35. Gravatar of Art Deco Art Deco
    13. March 2016 at 09:11

    “and the GOP seems to want to kick millions of highly productive workers out of the country (which would lead to huge price increases for fruits and vegetables)”

    As noted, unskilled labor is not ‘highly productive’. The notion that it would cause ‘huge’ price increases is pretty dubious. That aside, people spend about 7.5% of their personal income on groceries. About 11% of all grocery sales are of fresh fruit and vegetables. About 40% of the price of groceries is attributable to the retail vendor’s service provision. You have another slice attributable to the wholesaler’s services. Intermediate inputs account for about 1/2 of gross output in agriculture (though the figure many be lower for produce). The effect on the household budget from switching from wetback and bracero labor to domestic labor (or Chilean imports) is going to be difficult to discern.

  36. Gravatar of ssumner ssumner
    13. March 2016 at 15:55

    Christian, You said:

    “The Front National is very left-wing in economic terms.”

    You mean like single payer health care? Or protectionism? Or no cuts to social programs? Aren’t those Trump’s ideas too? Perhaps they are a bit further left, but it’s France, not the US.

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