Interest Rates Australia

Can the US lift interest rates without causing a recession?

www.first2move.com.au  

Wall Street advanced to new records Friday night, while earlier in the day Japan's Nikkei index and Seoul's Kopsi both stacked on healthy gains.

The UK, however, was a different story — the FTSE 100 dived to its lowest level in almost five months on Friday, but not for the reasons you would most suspect.

Barely a thought was given to the latest attack on a London train when trading opened in the city.

Instead, it was a vague hint from the Bank of England that it may consider raising interest rates from current emergency levels of just a quarter of a per cent.

And there's the key — it is the fear of rates, not rockets, driving global markets.

It's likely the Donald's big speech will be given scant regard by investors on Tuesday.

Instead, all eyes will be trained on the woman he despises and would desperately like to replace, Janet Yellen, the head of the US Federal Reserve.

Take a look at the comments to see what our readers had to say about the stock market.

Central bankers in a bind

They successfully dragged the global economy back from the brink of collapse almost a decade ago by flooding the world with cash and slashing interest rates.

But they solved a debt-fuelled crisis by piling on vastly more debt — so much of it in fact, that some fear it is impossible to unwind without causing chaos.

Central Bank Debt Growth

Central bank debt was sitting around 17 per cent of the size of the global economy when the financial crisis hit. It's now approaching 40 per cent, worth about $US20 trillion.

It's pumped up asset prices across the globe, rewarding borrowers and penalising savers.

That's why real estate from Sydney to Melbourne and London to Beijing has soared.

It's transformed anyone who bought an ordinary house in the suburbs into multi-millionaires and denied future generations the ability to ever afford a home.

It explains why Wall Street values are now stretched way beyond the dangerous levels of 2007 and are heading towards those that immediately preceded the dotcom collapse.

But how to unwind all this without sparking an even greater recession than perhaps we would have experienced in the aftermath of the financial crisis?

Central bank bubble trouble

Central banks pumped asset bubbles to revive the global economy, now they are desperately trying to deflate them.

The US central bank has more than $US4 trillion worth of government securities and other debt instruments on its books.

It bought them from financial markets after the US Government issued them, through a mechanism quaintly called quantitative easing.

Essentially, it was a fancy form of money printing, a method to inject cash into the economy.

On Wednesday, after her two-day meeting, expectations are running hot the US central bank chief may explain not just her interest rate intentions but also her plans to begin selling that huge pile of debt.

And that's where the problems begin. Selling them involves reversing the whole exercise. It will soak up cash, push interest rates even higher and cause panic on financial markets.

(Source: Australian Broadcasting Corporation )