Low to Negative Rates Sustain

KEY TAKEAWAYS

  • Trump called for negative benchmark rates once again but the Fed has ruled it out. The low to negative rates may lead to high inflation in the coming years.
  • More support of US reopening by Wharton’s simulation.

On 12 May, Trump called for negative benchmark rates again. Jerome Powell, The Chair of Federal Reserve, responded that he wouldn’t consider this option and all of FOMC voting members were against it. However, Powell admitted that the previous economic stimulus “may not be the final chapter”.

To date, Congress has provided roughly $2.9 trillion in fiscal support for households, businesses, health-care providers, state and local governments – equivalent to 14% of US GDP.

Goldman Sachs commented that negative rates may happen at a low probability for now, however it may be considered if a second wave of coronavirus were to strike again. Before that happens, the Fed is prone to further expand its balance sheet to 9-10 trillion USD, from the current 6.7 trillion.

Source: Federal Reserve

We previously discussed a simulation of national health and economic effect of State reopenings by Wharton Business School in “Crypto Market Sentiments Echo US-China Tensions”. The forecast model got adjusted on May 11. Effects of additional reopening are reduced under the new baseline. Additional job losses fall by 13 million, which supports the reopening of the US economy.

Source: Wharton Business School

Between 1942 and 1951, the Fed capped nominal yields at 2.5%, while inflation during that period was above 5%. As a result, US debt/GDP successfully saw a decrease from 120% in 1945 to around 70% a decade later.

Source: Refinitiv,Credit Suisse research

Source: Refinitiv,Credit Suisse research

Time will tell whether the US will employ the same tactic to relieve debt burden. Inflation may arrive when the economy recovers, probably in 2021. If it does, make sure you catch the fastest horse, Bitcoin, like what Paul Tudor Jones had told us.