One of the main assumptions currently being made about the economy is that interest rates will slowly rise in 2017 as a result of President Trump’s stimulus efforts and the Federal Reserve’s planned rate hikes.
But economic assumptions and projections often have a way of being wrong, and it’s possible that this rising-rate consensus is wrong too. Let’s take a look at an alternate scenario — stable or lower rates — and see if that could make sense.
Supply and Demand
If we go back to basics, the level of interest rates is a function of demand and supply. Today’s low rates came about from a huge increase in the supply of money from the Federal Reserve. Greater demand, in the form of more business loans, would tend to drive rates higher. Current assumptions about higher rates are based on the idea that business loan demand will increase and that supply will stay about the same.
One of my favorite economic bears, Dr. Lacy Hunt of Hoisington Investment Management in Austin, Texas, throws cold water on the rising business demand argument by pointing out several growth-dampening signs in his latest subscription quarterly review, including that world trade volume fell 0.7% in 2016, compared to the 5.1% average growth since 1992.