Interest rates around the world are rising. And because of this reality, the U.S. can’t lower its rates. While lower rates could spur our depressing housing market and help homeowners struggling with higher monthly home payments, global factors may be forcing the U.S. to leave its interest rates unchanged.
This morning, the European Central Bank raised interest rates for the eighth time to 4%. The ECB Rate (the equivalent of the U.S. Discount Rate) is now at a six-year high.
The ECB applies to the regions that use the Euro as their currency. The population of these European Communities (as they are referred to) is about the same as the U.S., over 300 million people. Hence, we are dealing with a significant marketplace.
With Britain’s bank rate at 5.5%, with the ECB key bank rate catching up, and other countries following suit with upwardly moving interest rates (Canada could be next to hike rates), there is pressure on the U.S. to keep its interest rates unchanged so currency markets remain stable. It is difficult to sell bonds to investors when those investors can get higher returns on bonds elsewhere — bonds denominated in rising currency values like the Pound and Euro. (The U.S. is very dependent on foreigners buying government issued bonds in our effort to finance our deficit.)
Can the U.S. cut interest rates this year? The short answer is likely not. Most analysts that had been expecting the Fed to lower its rates this year are revising their forecasts. Goldman Sachs just announced it expects no interest rate cuts in the U.S. in 2007. More bad news for the housing market and American consumers overburdened with debt.
NEWSFLASH — After growing at the slowest pace in almost four years in the first quarter of 2007, Fed Chairman Bernanke said yesterday the U.S. economy will get stronger in the second half of this year. While I’m at odds with Bernanke’s opinion on where the economy is going, I interpret his remarks to signal interest rates in the U.S. will remain unchanged for the next couple of Fed meetings. Interest rates in the U.S. have remained unchanged since the summer of 2006.