Last week many were expecting the Federal Reserve to finally increase interest rates in the U.S. That did not happen and now the focus for rate hikes is being shifted to next month or later. With rates being at zero for over 6 years, it seems there is only one place for rates to go, and that is up. While that would seem like the only viable option the reality is rates can go below zero.
To most, the idea of negative interest rates may sound far fetched and something the Federal Reserve would never enact. At the same time, many would have scoffed at the idea of a 6+ year period of 0% interest rates. I don't think negative interest rates are on the table right now but the Fed is in a position we have never seen and at this point we have to think anything is possible. What is probably more likely, however, is a continuance of zero rates for another year or more.
Still, negative interest rates are not out of the question. In June of 2014, the European Central Bank began charging banks in the Eurozone a 0.10% interest rate. Shortly after, the governments of Sweden, Denmark and Switzerland followed suit. Again, we don't think this is likely in the US but....who knows.
Inflation, or the lack of it, for the past several years has been a growing concern to many and talks of a deflationary environment became more prevalent. While falling prices are welcomed by consumers, a continued decline will lead consumers and businesses to delay making purchases or investments because they may feel a better deal will come along by waiting. Falling or stagnant wages is another risk brought on by deflation and is extremely important economically. Without wage growth the economic cycle is disrupted.
Inflation goals for central banks tend to be in the 2% to 3% range. Anything above 4% causes alarm and sometimes leads to measures being put in place to try and keep the economy from overheating. With deflationary risks around the globe, the idea behind negative rates is that more money will be spent by consumers and businesses to foster economic growth and stave off deflation as inflation should slowly start to kick in.
Given the various monetary tools and policies enacted in the last 10 years, no idea seems to be off the table and if inflation continues to remain stubbornly low with minimal global growth, NIRP could become a more popular acronym.
As for the market at large, we remain positive on our longer term outlook but as always vigilance is very important. A strengthening US economy is very important to the global situation and any slip here in the US could lead to further issues. If we had to place a bet on what the Fed will do moving forward we would continue with our stance that they won't touch rates. It seems ludicrous, even to us, but we are still not sold on the idea the Fed wants to raise rates any time soon. Yellen has stated how they think our economy may be ready for a hike but the global economy makes them worried. We see nothing on the horizon to change this stance. China's slowing economy, weakened oil prices, commodity decline and ISIS are all issues we don't see changing any time soon. Couple these with the fact that next year is an election year and we thing there is a possibility we won't see rates rise in 2016. As always, stay tuned.