The Era of Very Low Inflation and Interest Rates May Be Near an End

And with the United States closing in on full employment (or arguably already there), the Federal Reserve is looking more confident than it has in years in its intentions to keep raising interest rates.

Trump administration policies may also be playing a role.

New tax cuts and spending legislation will result in hundreds of billions of dollars more in Treasury bonds being issued in the years ahead than had seemed likely not that long ago. This means the government may need to pay higher interest rates to find buyers of that debt.

And if threats of a trade war with China or other countries turn into reality, this will tend to increase inflation, driving up prices both directly through new tariffs on imported goods and indirectly by encouraging less efficient production.

All of those forces are doing battle with longer-standing pressures in the other direction that have been in place since the global financial crisis a decade ago. This includes a chronic shortage of demand for goods and services and declining growth in the working-age population in many rich countries.

There have been fake-outs in bond and commodity markets on this front before, including in the second half of 2013 and in the months surrounding President Trump’s 2016 election victory. This could be another one, and reverse itself soon enough.

But in the meantime, you can view the higher volatility in the stock market in the last couple of months as a consequence of this standoff between forces of inflation versus deflation, between higher interest rates and lower rates, and between a world economy straining against the limits of its capacity versus one that still is working through chronic oversupply.

On Tuesday, when long-term Treasury rates soared, the stock market fell, as investors tried to assess the consequences of this higher-rate environment for stocks.

Article source: https://www.nytimes.com/2018/04/26/upshot/the-era-of-very-low-inflation-and-interest-rates-may-be-near-an-end.html?partner=rss&emc=rss