How Soon Will Interest Rates Go Up?

When U.S. interest rates go up so does the value of the U.S. dollar. Considering that the Fed seems to be moving slowly in this regard how soon will interest rates go up? According to ex Fed Chairman Alan Greenspan rates will go up soon. According to Bloomberg, Greenspan sees U.S. interest rates rising very soon and very fast.

“I cannot perceive that we can maintain these levels of interest rates for very much longer,” he told former Securities and Exchange Commission Chairman Arthur Levitt in a Bloomberg Radio interview to be aired this weekend and next.

“They have to start to move up and when they do they could move up and surprise us with the degree of rapidity which may occur,” Greenspan added.

Greenspan repeated his previously-voiced concern that the U.S. economy was headed toward a period of stagflation – stagnant growth coupled with elevated inflation.

“The very early stages are becoming evident,” with unit labor costs beginning to rise and money supply growth starting to accelerate, he said.

If you believe this then it is time to buy dollars and wait for the Fed to start jacking up rates. If Greenspan is right and the Fed does not react fast enough will we see a repeat of the 1970s and the stagflation that Greenspan predicts?

Stagflation

Stagflation has been referred to as an economic perfect storm of high unemployment, slow economic growth and high inflation. This term was used to describe the U.S. economic picture in the 1970s. Investopedia discusses stagflation.

A condition of slow economic growth and relatively high unemployment – economic stagnation – accompanied by rising prices, or inflation, or inflation and a decline in Gross Domestic Product (GDP). Stagflation is an economic problem defined in equal parts by its rarity and by the lack of consensus among academics on how exactly it comes to pass.

Governments tend to raise interest rates to deal with inflation which in turn tends to increase unemployment and slow down economic growth. Unemployment is as historically low levels. And inflation is low due to the low cost of petroleum products but wages are going up. In the 1970’s the sharp rise in oil prices was a large part of the stagflation of that era. It remains to be seen how oil prices could go up considering the current oil glut.

When Rates Do Go Up

Will a rapid rate increase forestall inflation? Should the Fed raise rates now? Not everyone seems to agree with Alan Greenspan. The Los Angeles Times suggests that a history lesson tells us no to a rate increase.

Almost 20 years ago, in September 1996, the Federal Reserve’s Board of Governors had an internal dispute over whether to raise interest rates.

Some board members, including present-day Fed Chairwoman Janet Yellen, argued that the Fed should therefore raise interest rates to push the unemployment rate up to a safer level. They understood that higher interest rates would mean slower growth and fewer jobs, but they viewed the risk of inflation as more dangerous.

Thankfully, Alan Greenspan, the chairman at the time, was not convinced. He won the fight, and the Fed did not raise interest rates.

The result was four years of low unemployment strong economic growth and employment went down to 4%. The Fed will decide but not everyone thinks that the risk of stagflation is immediate. If that is the case you do not need to convert all of you assets into dollars – yet.