29 March 2020
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This could be a shock to all you complacent individuals, but interest rates could soon rise and they might spike up rapidly!

Newsflash! Interest rates could rise rapidly!

Peter Switzer
19 August 2016

By Peter Switzer

Now this could be a shock to all of our complacency but interest rates could soon rise and they might spike up rapidly! That’s not my call but Alan Greenspan’s — the former Governor of the US central bank — the Federal Reserve!

The SMH’s Rich Miller dug up this outside-the-square view on rates after the former central banker did a Bloomberg radio interview.

I interviewed Alan Greenspan a few years back. He’s now 90 years of age and ran the Fed between 1987 and 2006. A lot of his fingerprints were over the boom before the bust of the GFC.

He went to the famous Juilliard School and played saxophone and clarinet along with his famous classmate — Stan Getz!

At times, his views have been outlandish and so harsh that critics would say he was playing a tune on rates that few people would listen to! However, being wrong occasionally doesn’t mean you are always wrong, so his views should at least be noted.

In the interview, he argued on interest rates that: "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." 

When I read this, I thought he could be arguing that economic normalcy for the US was on the way, where we’d see economic growth, lower jobless rates and inflation but, unfortunately, he’s now tipping that stagflation could be the USA’s fate.

This happens when an economy stagnates but inflation rises and was something that was first noted by economists in the 1970s. This coincided with a huge surge in oil prices, with the OPEC nations holding capitalism to ransom.  

The chart above shows that inflation can be down, note 1962-3, and then it can go mad, as happened in the early 1970s.

That said, I think this time is a little to a lot different from the 1970s, as oil suppliers don’t have the same leverage.

Greenspan thinks rising unit labour costs and a very loose monetary policy could create stagflation but it still remains an outside chance and, frankly, it’s too early to worry about this future.

I don’t get economists, of which I am one! It seems like they can only seek relevance by warning about stuff. There were loud economists two years back who were warning about Australia being in recession by now and the dollar at 60 US cents. And what about the guy who had it at 46 cents!

One day, they might be right and Greenspan might get his final place in the sun with his stagflation call. For the moment, however, the USA’s economic future could be one of the brightest stars in our economic planet, apart from us!

I bet we see gradual better economic readings out of the US and an interest rate rise in December after Donald Trump is trounced. And 2017 should be a good year for stocks. 

History shows between 1900 and 2015, the stock market has gone up 59% of the time in the first year of a new president. So it could be a close run thing for stocks, with US markets in all-time high territory.

I will be a little bit nervous about 2018 with the second year of a new president bringing a bad stock market 44% of the time!

The Yanks could be getting a little complacent after very low interest rates have made stock market bets easy to win but complacency in Australia has come after us not seeing a GFC-recession and after 25 years of no recession.

We might see one more cut in November, if the next inflation reading remains very low in October. If, however, the economic story can improve in the US and a Fed hike looks more certain in December, then rate cutting will be over.

I don’t want Greenspan to be right on stagflation and rapidly rising interest rates but I want to see an end to falling rates, as well as negative ones, and I hope we start seeing more normal-looking economies in 2017.

If we don’t, then this resident optimist will have to re-read the economic tea leaves!

By the way, the best way to kill off this stock market rally would be a rapid rising of interest rates and given what central bankers have been doing since the GFC, that scenario looks like a real stretch.

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