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Why Interest Rates Could Remain Low

Rick Rieder of BlackRock

4 Factors Weighing On Labor Markets—And Implications For Fed Policy (Part 5 of 5)

(Continued from Part 4)

The upshot for investors? We think interest rates could remain low and forward guidance dovish for a some more time.

Effective Federal Funds Rate

Market Realist – Interest rates could remain low due to poor labor market conditions

The graph above shows the history of the federal funds rate. The federal funds rate is a tool that the Fed uses to control the interest rate in the economy. The rate has been close to zero for over six years.

The Fed has kept interest rates low despite the pick-up in the GDP growth rate. This is mainly because the US labor market has major structural issues, as discussed in the earlier parts. The Fed is keeping the funds rate low because lower rates could support business expansions, which, in turn, could lead to more jobs and higher consumption. Hence, interest rates could remain low for a while.

Also, low inflation gives the Fed some leeway in this regard. The sudden slump in crude oil (USO) prices have led to the fall in inflation in November. Inflation could remain subdued for quite some time.

If interest rates rise, corporate bonds (LQD) and Treasuries (TLT) will decrease in value. This is because their yields will rise along with interest rates. However, in the mean time, Treasuries could see some traction, as global equities (QWLD) are in turmoil due to the global slowdown. This is because investors could take their money out of risky assets like equities, and reallocate their funds into much safer assets like the US Treasuries. The 10 year Treasury (IEF) has dipped below the 2% mark and could go down further.

Read Market Realist’s series on The New Fixed Income World for more on this topic.

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