Here’s Why Interest Rates Could Be Locked in Until 2018
The Economy

Here’s Why Interest Rates Could Be Locked in Until 2018

Everybody thought interest rates were heading upward in 2016. But one global bank, BNP Paribas, now thinks that the Fed may be stuck in place for the next two years. 

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When the Federal Reserve decided that it was time to start normalizing interest rates back in December, the debate over the wisdom of the decision was generally limited to whether the central bank should have waited a few more months and started moving off the zero bound sometime in 2016.

Now, however, with the state of the economy in serious question, analysts are beginning to question whether there will be any more movement in rates before 2018.

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On Thursday, BNP Paribas analysts released a markedly pessimistic assessment of the US economy’s short-term future and the effect it will have on interest rates.

The benchmark fed funds rate had been at zero since December of 2008, and the Federal Open Market Committee’s decision to hike it by one quarter of a percentage point two months ago wasn’t exactly a shock. BNP itself had previously predicted seven additional rate increases before the end of 2017.

However, BNP analysts argue that in hindsight, given low oil prices and a slowing global economy, not only was the December rate hike the wrong call, but that the number of rate hikes expected in the next two years is no longer seven, but also zero.

 “Our overall conclusion is that, for a variety of reasons connected with US policy and developments abroad, US policy has tightened prematurely and has reached neutral too rapidly,” analysts wrote. “This development is not adequately captured by looking at the fed funds rate alone. We believe current policy is consistent with growth in line with the 1.5 percent trend, but no more.”

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“The current boost to consumer demand from lower oil prices is giving a false sense of security on the economy,” they continued. “We believe a slowdown is coming (though not in Q1 2016) to growth of 1.5 percent in 2017. In light of this, no further tightening of fed funds is warranted this year or next.”

The Fed, of course, doesn’t take its marching orders from international bankers. But the fact that the global economic slowdown is affecting the US is hard to dispute, and at least raises the possibility that interest rates could remain at historic lows for several more years.