The Gold Report: The U.S. Federal Reserve has downgraded its forecasts for both economic growth and inflation. That being the case, why would it raise interest rates?
Chris Mancini: There’s a certain contingent in the Fed that believes that its zero interest monetary policy might result in adverse consequences going forward. This contingent is dead set on raising rates and trying to get back to some level of normalcy in interest-rate policy.
TGR: There’s a school of thought that holds that the U.S. economy has become addicted to cheap money. What’s your view?
CM: There’s no question that much of U.S. economic growth in recent years is due to very low interest rates. The average interest rate on auto loans is the lowest ever. That obviously spurs auto sales. The rates charged for federally subsidized student loans are close to historic lows. That spurs demand for college and university courses. And even though the housing industry is still struggling with an inventory glut, the 30-year mortgage rate of 3.75% spurs demand for housing.
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So, I think that if interest rates do rise, there’s a good chance that the economy will slow, and there will be a panicked reaction from the stock market.
TGR: Despite this soft recovery, the equity markets have never been stronger. Why has this happened?
CM: It’s another function of low interest rates. If you keep your money in the bank, you’re getting zero percent and thus losing money on a real basis. This has forced savers into other asset classes. And money is flooding into America from all over the world because, compared to, say, the Eurozone and Japan, which are struggling with deflation, the U.S. economy looks pretty good.
TGR: Is …read more