The Fed signals the end of the era of cheap money

The era of cheap money may soon end

The era of low interest rates may be over. Policymakers signaled they don’t expect low interest costs to return anytime soon.

The FED decided to keep interest rates at the highest level in two decades and left open the possibility of raising interest rates again before the end of this year. However, there is still an important factor hidden deep beneath the newly published economic forecasts.

FED officials do not expect interest rates to tighten too much this year, but from 2024 onwards, things will change. Experts predict short-term interest rates will remain above 5% next year. This number by the end of 2025 will be nearly 4%, which is nearly double the level at the end of 2019.

By 2026, the Fed hopes inflation will be completely quelled and economic growth will stabilize back to its long-term trend – interest rates will still be expected to be higher than before COVID-19 appeared.

In other words, higher interest rates are likely to stick around for years.

That conclusion partly comes from a simple observation: the FED has raised interest rates strongly over the past year and a half, the lag in policy impact is too long.

Professor Gabriel Chodorow-Reich (Harvard University) commented: “They are very surprised at the level of development of the US economy this year. Economic strength remains, suggesting interest rates may need to be higher to put pressure on growth. The Fed’s policy is not as tight as we thought.”

Consequences follow

The Fed’s monetary policy and interest rates affect the rest of the economy, making it more expensive to borrow money to buy a car, a house or expand a business. For example, mortgage interest rates are currently above 7%, up sharply from a low of around 2.7% before the Fed began its anti-inflation campaign.

High interest rates can also be a problem for borrowers with large debts. This is an issue that both commercial real estate companies and the U.S. government are facing.

The US stock market is still quite gloomy. The S&P 500 index fell 1.6%. The longer interest rates remain high, the more they erode corporate profits.

But for the economy as a whole, higher interest rates could bring some positive changes.

The Fed’s economic management tools do not work effectively during low interest rates. Officials struggled to boost the economy enough in the years after the 2007-2009 recession, as even near-zero interest rates could not attract capital mobilization and stimulate demand. Recovery has been at a slow pace for many years. Rising interest rates can make it easier to stimulate growth during difficult economic times. Additionally, higher interest rates can also be good news for those who have been trying to save.

Of course, analysts predict that the FED’s interest rates may not come true.

The Fed’s economic forecasts have been criticized for being unreliable, especially in the long term. If the economic recovery stalls in the coming months and the US unemployment rate spikes, policymakers could be forced to cut interest rates more than expected.

When asked why FED officials expect interest rates to remain at a higher level until 2026, Chairman Powell explained that the US economy has grown strongly recently. However, the leader has not yet drawn a conclusion on the duration of interest rate maintenance.

Source: Vietnam Posts English