Fed lifts rates

Fed Raises Rates

Interest rates in major advanced economies have been falling for around 30 year.

In the international economic community, the question of what is driving lower interest rates remains one of the most important macroeconomic question.

Two leading theories exist:

  1. Permanent – Secular stagnation: key proponent is Larry Summers
  • Low population growth, the low capital needs of many new businesses and the lower relative price of capital are reducing domestic investment and consumption
  • Given these forces are structural, interest rates should remain low under this scenario
  1. Transitory – Savings glut: key proponent is Ben Bernanke
  • Government policy (especially in East Asia) created an excess of desired savings over desired investment. After the crisis, East Asian countries started accumulating large US treasury reserves without increasing their own debt; not creating other savings vehicles to replace them
  • Given China moving away from export dependence, emerging market build-up of foreign reserves is slowing and excess savings are falling with oil prices, this view suggests interest rates should be higher over the longer-term

 

Andrew Charlton

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