It’s time for the Fed to raise interest rates?
The Bank of England (BoE) Governor, Mark Carney, said that more relaxed monetary policy might be needed to boost the pace of economic growth in the UK after the decision to leave Britain from the European Union, or what we know as Brexit. Is that right?
According to Mark Gilbert, a Bloomberg columnist and former London bureau chief for Bloomberg News, such a policy would keep “zombie companies” alive, trapping capital in unproductive businesses that were almost dead. While negative interest rates are unprecedented and it looks like letting a doctor experiment with his patients. Mark Gilbert saw that higher interest rates could be a better approach based on demographics.
In his column, Gilbert presents data about changes in the composition of the world’s population between young people (under the age of 15) and old (over 65 years).
The composition of the world’s population aged over 65 years almost reaches 9 (nine) percent of the world’s population and has experienced a steady increase since the beginning of the last decade. For the euro area, the composition is even close to 18 percent while in the United States (US) alone there are 15 percent of the population who have passed retirement age. That number increased by 12.5 percent compared to the figure ten years ago.
The number of world population entering retirement age is not only increasing, but also getting richer and being able to buy a house that is truly feasible and benefit from pension funds. They are also able to spend the money they get from their savings.
However, with almost zero interest rates, there is no income from their savings. They also do not want to touch the capital they deposit on their deposits. Therefore, if interest rates become lower, then the level of spending by the elderly will also be lower. Instead of increasing investment and demand, loose monetary policy might actually “kill” the purchasing power of baby boomers .
According to Gilbert, the policy of low interest rates that drags on will not only wipe out deposit rates. Retirees will be fooled if they follow the standard advice of health advisors by moving their pension funds to other sectors, for example to a fixed income or bond mutual fund. As evidence, US Treasury yields are only 1.4 percent, down 1 percent compared to last year and have even fallen by an average of 4.3 percent in the past decade. Whereas in the 1990s, these securities were able to produce 8.5 percent yields. In short, the lower the bond yield , the lower the level of spending and this is bad for the economy.
Those who are approaching retirement age are also likely to be affected by low interest rates . They are likely to feel the need to save more because to get large returns, a large capital is needed with low interest rates. In turn this will again reduce the level of spending.
In fact, even though interest rates are at an all-time low, US savings rates are based on a percentage of their income that has increased and has reached six percent at the end of the first quarter of 2016. That is, the quantity of money they save from their income is getting bigger. This is the highest level since the end of 2012.
US Deputy Chief Economist at UBS in New York, Drew Matus, in April 2015 once argued as follows:
“Interest rates that are too low can be the same as disturbing them with too high interest rates. The theory of low interest rates will spur the economy, pushing consumption and investment higher. That hasn’t happened in post-crisis situations. Deposit rates have risen and investment has weakened. Zero interest rates actually become part of the problem rather than the solution: low interest rates actually trigger an increase in savings and the company’s decision to refrain from investing, reducing capital spending. “
The idea of raising interest rates could in turn trigger consumption and lead to an accelerated increase in inflation. Economists call this theory Neo-Fisherism. Indeed, this seems contradictory. In modern central bank theory, this is in the “unusual policy” chapter.
Some have applied negative interest rates. There is also a petition of members of the European Parliament requesting the European Central Bank to consider implementing a ” helicopter money ” strategy. Thus the option of raising interest rates might make sense to save the economy .
And the Federal Reserve is currently very likely to be considering that.