We often think of today’s monetary policy backdrop of 0% interest rates as being unprecedented. Here in the UK, for example, short-term rates – the Bank of England rate basically – haven’t been this low since at least 1694, and perhaps even further back than that. However, while there are no precise parallels for what we’re living through, a dig around shows it’s not quite as unique as we might think.
The other day, I pulled out an old Federal Reserve research paper from November 2000: Monetary policy when the nominal short-term interest rate is zero. One of the many charts in this rather dry read notes that US short-term rates fell to near-0% after the Great Depression, and occasionally even dipped into negative territory between 1938 and 1941.
Of course, plenty of people have made comparisons between today and the 1930s. We’re all worried about populism, false recoveries and deflation. But putting aside geopolitics, what really made me stop and think is just how long it took for US rates to rise from that 0% level. Rates first hit 0% in 1932. They didn’t get back above 1% until 1948, and it was the 1960s before they got back to the 5% most of us consider “normal”. Might we see something similar today? Might a full-blown return to normality be decades rather than just years, or even months, away?
You might think not. The Fed has already raised rates once (in December), and with US inflation picking up, many fear that Fed boss Janet Yellen and her team are already “behind the curve”. And the reality is that they almost certainly are – the US economy is hardly firing on all cylinders, but the latest data suggest that things are picking up slowly.
But there’s a catch – and it’s a big one. As Niels Jensen notes in the Absolute Return Letter, global debt is simply too high to sustain a significant rise in rates. The Fed knows that “low interest rates are the only way a massive default can be avoided. It is therefore no coincidence at all that they appear to be behind the curve.”
Inflation – the “soft” default option – is the easiest way for central banks to deal with the debt, and that’s the path they’ll stick to. So not only can we expect low interest rates to continue – perhaps for much longer than we would have thought possible – don’t be surprised to see inflation nibble away at your returns too. That’s grim news for savers – it makes it tougher than ever to generate a decent return on your money.