Will Interest Rates Ever Rise? One Economist Has Hope

The global economy fell off a cliff near the end of the first quarter and hasn't fully climbed back. Since the United States is such a huge part of the world economic machine, all eyes are on America.

Trying to predict what is going to happen on issues such as record-low interest rates and double-digit unemployment is very difficult, said Quincy Krosby, chief market strategist for Prudential Financial.

For starters, there are too many unknowns. Will Congress provide another trillion-dollar stimulus package? Will the COVID-19 pandemic release Americans from its death grip? Finally, will President Donald Trump be re-elected?

"What was once extraordinary in terms of monetary policy has become ordinary," said Krosby, who formerly represented the U.S. as a diplomat broad and at the International Monetary Fund.

She will deliver a presentation today on "Understand the Global Economy" at the LIMRA Life & Retirement Virtual Conference.

What About The Fed?

Interest rates are of particular concern to her audience. As of Monday afternoon, the ten-year Treasury rate stood as an ultra-low 0.64%, about where it has hovered since the COVID-19 pandemic first chilled the economy in March.

"Rates can inch higher and perhaps even over 1%," Krosby said. "One of the things you don't want is that rates climb higher because inflation climbs higher, but growth doesn't climb higher along with it. That's stagflation."

The virtual Jackson Hole Economic Symposium kicks off on Thursday and could yield some economic clues from the central bankers in attendance, Krosby said.

Federal Reserve Chairman Jerome Powell is expected to indicate the Fed's willingness to introduce inflation averaging at the September meeting, Forbes reports. That would open the door to targeting modest overshoots of the 2% inflation target to compensate for periods of below-target inflation.

"What do they do if inflation takes off and they want to keep rates lower for much longer -- would they do that?" she asked. "And do they then introduce a modified version of yield curve control?"

Yield curve control aims to control interest rates along some portion of the yield curve. The yield curve is usually defined as the range of yields on Treasury securities from three-month Treasury bills to 30-year Treasury bonds.

Partly Psychological

Tracking prices will be an important barometer for where the economy is heading, Krosby said. For many consumers, a lack of confidence could drive inflation.

"In many of the surveys, consumers are saying they see higher prices down the road," she said. "Inflation is also psychological, very much psychological. Because if you think it's going to be more expensive later on, you will buy it today."

Discussions around interest rates, investment capital, inflation and jobs are all important. But none of it matters unless the U.S., and the world, gets a firm handle on COVID-19, Krosby said. The next several months will be important to watch, as vaccine development continues, but also whether a "second wave" emerges in Europe and Asia.

"The market is a discounting mechanism -- it will look ahead three months or even four months if it believes that vaccine is available, it's safe and we're just getting ready to distribute it," Krosby explained. "The market can look beyond that. But without that, you'll have a market that is going to struggle and will probably require more aid from the government, more aid from the Federal Reserve and the question will be do we have a lockdown again?"

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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