In the seven years since the world's central banks responded to the financial crisis by slashing interest rates, more than a dozen in advanced economies have subsequently tried to move rates back up. Not a single one—in the eurozone, Sweden, Israel, Canada, South Korea, Australia, Chile and beyond—has been able to sustain interest rates at the higher level it sought.
That points to a risk for the U.S. Federal Reserve as officials contemplate raising short-term interest rates for the first time in nearly a decade. Whether or not they move at their meeting this week, as they have suggested they could, they expect slow but steady increases in the next three years. If their judgment is right, the economy will keep growing, unemployment will stabilize at a low level and inflation will slowly move higher as they proceed.
But if recent history outside the U.S. is any guide, the economy might not cooperate and rates could remain exceptionally low for a long time.
Central-bank U-turns on rates in recent years had different causes and consequences. European Central Bank officials in 2011 worried about rising commodities prices. In Sweden, Canada, Australia and Israel, housing booms became a nagging concern. The Bank of Canada and others saw recoveries building and a case for higher rates as joblessness fell.
The Bank of Israel, under Stanley Fischer, who is now the Fed's vice chairman, was among the first to move. It started raising rates from 0.5% in September 2009, just as a global recovery took hold, pushing them up to 3.25% by May 2011.
With Israel's economy buffeted by Europe's downturn and global inflation slowing, Mr. Fischer's successor, Karnit Flug, has since pushed rates back down to 0.10%.
Two central banks that haven't raised rates since the crisis—the Fed and the Bank of England—have enjoyed stronger recoveries than others. Their patience might pay off. Their economies might now finally be healthy enough to bear higher rates.
The postcrisis experience of others includes a lesson, said Royal Bank of Scotland economist Marcus Wright, who studied policy reversals among advanced-economy central banks: "Be very, very cautious on raising rates. There needs to be a really, really strong case."
Sweden began to raise rates in 2010 amid concerns that easy credit was causing the housing market to overheat. Despite high unemployment, the Riksbank raised its benchmark rate by 1.75 percentage points to 2% between July 2010 and July 2011.
The increases were followed by a drop in inflation and a reversal in employment gains. With an escalating debt crisis in Greece exacerbating the hit to Sweden's economy, the Riksbank reversed course and was cutting rates by December. It is now among a handful of European economies with negative interest rates—it charges banks to leave funds on deposit with the central bank.
"Tightening too early can have very large costs, as it has had in the Swedish case," said Lars Svensson, who quit as Riksbank deputy governor in 2013 in protest at the bank's policy decisions.
Various factors are holding rates down now, many of them out of the control of central banks. Slowdowns in developing economies, particularly China, have weakened demand for commodities and pushed down prices. Banks in advanced economies have been slow to heal from the 2007-09 crisis, squeezing private-sector credit. Aging populations in advanced economies and low productivity growth have sapped the ability of economies to sustain the higher rates central banks sought. And governments focused on fiscal restraint have left it to central banks to provide stimulus.
Central banks can't push rates higher in the long run than their economies can fundamentally bear, said Mr. Svensson. In the post-crisis environment, central banks have had trouble setting rates low enough to energize their economies, he said.
Some central bankers say hindsight is nice, but they need to react to the economic circumstances as they evolve.
Riksbank Deputy Governor Per Jansson, in a 2014 speech, responded to critics saying, "with hindsight, it is clear that monetary policy could have been somewhat more expansionary if we had known that inflation would be as low as it is now." But, he said, "This is a natural and unavoidable consequence of the fact that monetary policy has to be based on forecasts, which are uncertain."
Former ECB President Jean-Claude Trichet, who pushed eurozone rates up in 2011, said he needed to react to rising inflation driven by commodity prices and a threat that households and businesses might expect higher inflation rates in the future. The ECB's mandate was for inflation near 2%, and the ECB delivered "exactly what we promised" during his term, he said in an interview. Subsequent rate reductions happened after he left and the inflation backdrop shifted, he said. Mr. Trichet said he used other measures to combat financial turmoil, including bond purchases and emergency loans to banks.
The Fed's own history suggests that raising rates after a financial crisis can be an excruciatingly slow process prone to missteps.
In 1936, seven years after the 1929 stock-market crash, the Fed moved to raise banks' reserve requirements. The government also sought to prevent an inflow of gold from pushing up money supply and the government implemented tax increases and cut federal spending to improve fiscal balances. The combination caused banks to curb lending, which hit employment and growth, and the U.S. fell into its third-worst recession of the 20th century.
The Fed reverted to an easy-money policy that persisted well past the end of World War II. Rates on three-month Treasury notes didn't rise above 1% until 1948 and didn't get above 2% until 1952, nearly a quarter century after the 1929 crash.
Fed officials now say they plan to move gradually. But their expectations for rates could still be too high. Officials in June estimated the central bank would raise the short-term federal-funds rate from near zero now to 1.625% by the end of 2016 and to 2.875% by the end of 2017.
Investors have a different view. Fed-funds futures markets, where traders place bets on the outlook for the central bank's benchmark interest rate, put the Fed target at under 1% at the end of 2016 and under 1.5% at the end of 2017.
In anticipation of the Fed's next policy meeting, some officials have said they expect to reduce their projections for rates in the future. Their projections for where rates will end up in the long run have drifted down by a half percentage point during the past three years.
But history and market expectations suggest that gradual in the Fed's eyes might not be gradual enough.
Write to Harriet Torry at harriet.torry@wsj.com and Jon Hilsenrath at jon.hilsenrath@wsj.com
No comments:
Post a Comment