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Low Rates For How Long?

Global interest rates have been lower than expected for the past couple years. And during that time, people have speculated how quickly interest rates would recover to normal levels.

In December I saw two things that I thought were interesting in this regard.

The first was an article with the Bank of England governor stating that they were going to keep interest rates low until unemployment falls to 7%. One of the most popular tools for central banks is to hold interest rates down, hoping to stimulate the economy and employment rates. This is known as expansionary monetary policy - a popular strategy among central bankers.

The other item that caught my attention (highlighted in a podcast I listen to) was an old, but brilliant interview with British billionaire James Goldsmith. In it, he debated the dangers of free trade with no rules or protections. One of his arguments was that workers with rights (such as good conditions, overtime pay and holidays) cannot compete against workers without rights. Goldsmith predicted unemployment in economies with worker rights would soar as corporations continually sought out lowest cost production, since that is what they must do to survive without government intervention.

There is a saying that if all you have is a hammer, everything looks like a nail. In this case, central bankers have announced their plans to continue hammering at unemployment with low interest rates, hoping what worked in the past will still work today.

But what if Goldsmith is right and the economy has structurally changed?

Interest rates might not recover until central bankers rethink their strategies.