The Federal Reserve Does Not Raise Interest Rates In December Anyway.

Deutsche Bank believes that the Fed's rate hike will be a wrong decision.

In its October meeting minutes, the Fed said that the long-term equilibrium real interest rate was at a "low" level, while Deutsche Bank believed that the long-term equilibrium real interest rate was a negative value.

Therefore, if the Fed raises interest rates, it is likely to be forced to raise interest rates in the future and even further implement quantitative easing.

After the financial crisis in 2008, the Federal Reserve lowered interest rates to the lowest point in history and entered the era of zero interest rate, and began to implement QE until last year.

Although the zero interest rate policy and QE both stimulated the economy to a certain extent and inflamed asset bubbles, the Fed finally admitted that they could not "repair the economy" very well.

Whether it was released in September, which was much lower than expected in the United States, and after the announcement of the October FOMC meeting minutes after the hawkish signal was strongly released on September, stocks rose.

Therefore, for the fed to raise interest rates, the US stock market reaction is elusive.

But the recent US Treasury yield curve suddenly became flat (the difference between the yield of 30 - year treasury bonds and 2 - year treasury bonds) declined, indicating that the market expected the fed to make a wrong policy and responded.

After the announcement of the FOMC conference in October, the assets of the United States, gold and crude oil rose and the dollar fell.

Goldman Sachs explained that as the minutes of the meeting showed that the long-term natural interest rate was low, the adjustment of the current interest rate of the Fed would be very slow. If the economic recovery is weak in the future, the Federal Reserve will again undertake quantitative easing.

Dominic Konstam, the global head of Deutsche Bank's interest rate study, gives a more credible explanation: after the financial crisis, the Fed's monetary policy is still unclear.

The long-term equilibrium real interest rate is not only at a "low" level, but in fact it is a negative value.

The Fed's rate hike will be a wrong decision.

There are two views on the impact of interest rate increase: the first is the "traditional" view approved by the Federal Reserve, the short-term equilibrium real interest rate (natural interest rate) is around zero, and the second view is that the equilibrium real interest rate is negative.

Deutsche Bank first gave the Fed's economist's view:

The first view is that the short-term equilibrium real interest rate (natural interest rate) is about zero.

Because the nominal federal funds rate is very low, zero is the lower bound, and monetary policy is loose, which is why the labor market can be improved rapidly.

Inflation has not risen, because it is a lagging indicator.

But some form of Phillips curve still exists, so the inflation rate will eventually reach the target of 2%.

According to this view, if inflation rises and nominal economic growth rises, the nominal interest rate will rise.

Even if the equilibrium real interest rate has not changed, the Fed will at least be able to raise interest rates to the market's final interest rate, which is slightly below 2.5%, which will not cause serious harm to the economy.

If the equilibrium is real

That will be better. The market will move in the direction expected by the Fed, and the final interest rate will be near the target of 3.5% of the Federal Reserve.

Deutsche Bank said the market generally expects the fed to raise interest rates by 0.25%, which appears to be very small. But if the equilibrium interest rate is negative, then the interest rate hike will damage the economy.

even if

A small margin may also cause the actual federal funds rate to be above the short-term equilibrium real interest rate, further reducing demand.

Then the economy will fall into recession, and the Federal Reserve will soon be forced to suspend interest rate hikes.

In addition, such policy errors (raising interest rates) will lead to structural damage and further downward pressure on the equilibrium real interest rate.

In this case, the yield curve will flatten until the Fed changes its policy direction by cutting interest rates.

Deutsche Bank believes that the Fed will make the wrong decision, if interest rates increase, the future.

Not only will it be forced to cut interest rates, but it is likely to further implement quantitative easing.

The view of Deutsche Bank is similar to that of Goldman Sachs.

As we have said in the past, the unconventional monetary policy will continue to be maintained.

The minutes of the FOMC meeting of the Federal Reserve in October proved this point.

According to the meeting minutes, some policymakers believe that the Fed will "cautiously use additional policy tools" because the long-term equilibrium real interest rates are at a low level. If the future economic downturn falls, it is likely that interest rates alone will not stimulate the economy.

Unlike the Fed's economists, Deutsche believes that a balanced real interest rate of less than 0 is negative.

Now the nominal interest rate is much lower than the Federal Reserve's view, while the equilibrium real interest rate is negative.

The current policy is not too loose, in fact inflation is higher than its equilibrium level (close to 1%).

Some may think that the debt ratio implies a lower equilibrium short-term interest rate.

For example, if nominal growth is 3%, the ratio of debt to GDP is 300%, the equilibrium nominal interest rate is about 1%, when all GDP growth is used to cover interest costs.

When non-traditional policies such as quantitative easing lead to debt increases, interest rates will be hit once the Federal Reserve raises interest rates, which will cause economic collapse and the Federal Reserve will be in trouble.

Deutsche believes:

In this case, the Fed will raise interest rates and real economic growth will slow down because the productivity remains weak when full employment is achieved, and the profit / price will be limited because of higher wages.

Moreover, nominal growth will also slow down, even slower than the real growth rate, because inflation will drop to 1% or below.