Where Will Interest Rates Be in 10 Years?

Retirees commonly put more money into bonds than stocks in order to preserve capital in case of a market crash. However, today’s really low interest rates don’t provide an income stream sufficient to pay expenses without eating into that stockpile of capital. We are in a period of historically low interest rates. How long will this last. Whether you are a Forex trader or an investor nearing retirement it is appropriate to ask where will interest rates be in 10 years?

San Francisco Fed Says 1%

The Fed will raise rates as the economy warrants. According to recently published research rates will not go up very fast for quite a while. Bloomberg reports that the Fed is heading for a shallow rate path for the next decade.

Some at the U.S. central bank may still be too optimistic about how high interest rates can rise in the longer run, based on new Federal Reserve Bank of San Francisco research.

San Francisco Fed economist Kevin Lansing started with a simple premise: estimates of the inflation-adjusted neutral interest rate – the one that neither stokes nor slows growth – track pretty well with the U.S. Congressional Budget Office’s four-quarter growth rate of potential GDP estimates. Looking at the CBO’s projections for the next decade, he predicts “a very gradual rise” in the neutral rate, referred to as r-star in standard economic models, from near-zero in 2016 to about 1 percent in 2026.

It turns out that the consensus projection of Fed authorities is 1.5%. Economists worry that if the Fed does not raise rates it will not have the wherewithal to deal with an economic downturn as there will be no rate to cut! Forex traders can expect less market volatility in the dollar if rates don’t move about and retirees will need to look to investment vehicles like dividend stocks to see a little growth to keep their retirement savings from running out.

How about Negative Rates?

If another recession comes and the Fed needs to lower rates will they go negative? The Fed Vice Chairman, Stanley Fischer, says that countries that are using negative rates think they are successful. He also notes that the U. S. Fed does not currently think this would be necessary.

Fischer’s comments on negative rates come days after Chair Janet Yellen left the subject out of a speech on the future U.S. monetary policy toolkit, suggesting that they’re not an option that’s up for discussion at the Fed. Fischer is a former Bank of Israel governor and a prominent figure in international economics, so his remarks constitute an important acceptance that the unconventional and often controversial policy might be working in other jurisdictions.

“We’re in a world where they seem to work,” Fischer said, noting that while negative rates are “difficult to deal with” for savers, they typically “go along with quite decent equity prices.”

The problem, again, is for savers and retirees when rates go negative. And of course Forex traders will need to pay to park cash in their Forex accounts as well!