How Low Can Interest Rates Go?

Popular Economics Weekly



Why are interest rates so low—not just in the US? It’s been below 0 percent in the northern EU countries and Japan for years because there is little worldwide inflation, which means there’s not sufficient demand for the things people and businesses buy that would boost inflation and interest rates higher.

The housing market is usually an infallible indicator of inflation trends. The S&P Case-Shiller Home Price Index, for instance, shows housing prices rising 3.4 percent annually in May, when it was rising at 5 percent over the past several years. It’s a 3-month average of same-home sales that smooths out some of the bumps due to the difficulties in collecting national sales data that always qualify the price estimates with + or – double figure brackets.

The above Case-Shiller graph highlights the percentage changes. Its huge dip occurred during the Great Recession that busted the housing bubble. Its highest point since then was in 2014, and it began to dip below 5 percent in early 2018.

There’s not much the Central Banks can do about the falling interest rates, since they are already so low. They equivocate as much as the financial markets, which tells us things could get worse. The stock market is swinging wildly as more investors flee to save haven investments like bonds, which drives down interest rates further.

For one thing, JP Morgan says a recession could occur in 9 months if Trump can’t resolve the China trade war soon (Hong Kong unrest, for starters?). And economists are beginning to conjecture that if the inverted yield curve—with 1.65 percent 10-yr Treasury yield below the 2-2.5 percent fed funds rate and 2-year bond yields—remains inverted for too long, 1) banks could cut back their lending sharply, tightening credit markets, and 2) investor confidence will fall as more flee from stocks to bonds, while corporations cut back on capex spending due to future uncertainty.

It certainly looks like housing prices might continue to decline, in spite of still record-low mortgage rates, and even though mostly higher-priced homes are being built these days.

The conforming 30-year fixed mortgage rate has now fallen to 3.25 percent, the lowest I’ve seen it in my 30+ years as a Mortgage Banker, though the Prime rate on which most installment and credit card rates are based is at 5.25 percent. Prime dropped 0.25 percent in concert with the last week’s 0.25 percent Federal Reserve rate reduction, but stay tuned on further Prime rate drops, if consumers cut back on their spending.

Consumers might continue to spend for the rest of this year if consumer sentiment holds up, because the job market is still expanding. The latest JOLTS report (Job Openings and Labor Turnover Survey) says there were 1.65 million more job openings (7.35 million) than the 5.7 million new hires in July.

Why do I see interest rates, and inflation declining further? There’s a worldwide decline in foreign trade that totaled $17.7 trillion in 2017, on which most economies depend. And tariffs will become more reciprocal as other countries retaliate with their own import tariffs. It should be obvious to all by now that tariffs are really a tax on imports, and financial markets know this.

So the financial markets are telling us this isn’t the right time to raise taxes.

Harlan Green © 2019

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About populareconomicsblog

Harlan Green is editor/publisher of, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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