The long-term historic average interest rate at the US Federal Reserve is 5.81%, based on data recorded between 1971 and 2017. Over this period, the lowest the rate has ever been was 0.25% (from December 2008 until December 2015) and an all-time high of 20% back in March 1980. Despite rate rises at the end of 2015 and 2016, the Federal Reserve interest rate is still contained in a band from 0.5 to 0.75%, very much below the historical average. By way of comparison, the average inflation figure is 3.29% (1914-2017) with a low of -15.8% during the Great Depression in 1921 with a peak of 23.7% a year earlier in June 1920. Currently, it stands at 2.5%.
Central banks want to see low, stable levels of inflation and the traditional tool to boost or slow economic activity is interest rate policy, but at ultra-low interest rates that have been seen since the Global Financial Crisis, cutting rates ceases to be an option which was why the Federal Reserve and some other central banks resorted to “Quantitative Easing†as a mechanism to boost liquidity and the money supply with the aim of priming the economic pump.
Federal Reserve Chairman, Janet Yellen, has hinted that the Fed may act to push interest rates up in the near future in a speech to Congress. “Waiting too long to remove accommodation would be unwise, potentially requiring [the Fed] to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. At our upcoming meetings [we] will evaluate whether employment and inflation are continuing to evolve in line with [the Fed’s] expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”
The comments caused the Dollar to rally against other major currencies, buoyed by the prospect of (slightly) higher returns on Dollar holdings. It is anticipated that the Fed will continue with its policy of incremental rises, probably in 0.25% bites.
