At the end of last year, many on Wall Street predicted interest rates would finally start rising in 2014.
They were wrong.
Greg Valliere, chief political strategist at Potomac Research, argues that the interest rates forecast is one of the things that Wall Street and Washington get wrong consistently. And he believes they will get it wrong again.
“The smart money says — again — that rates will surge next year; the smart money has said that for the past several years, and we still don’t buy it,” he wrote in a note on Tuesday.
These are his five reasons why rates will stay low:
- Another European crisis will send investors flocking to the safety of US treasuries. For instance, Greece is looking worrisome again. A failed presidential vote Monday means an anti-austerity party may take control and increase chances that the country restructures its debt.
- The Russian debt crisis is another reason to plow into US treasuries. Lower oil prices make it more likely that Russia will default.
- We’re witnessing the most dovish Fed in our lifetimes, which is reluctant to hike rates and will do so gradually when it eventually starts. Chair Janet Yellen and her colleagues have stressed that labour market slack remains and global growth is slowing down.
- Deflation fears will persist largely because of lower energy prices that will dampen core inflation.
- The federal budget deficit continues to fall, easily dropping below 2.5% of GDP this year compared to 2.8% at the end of the fiscal year that ended on September 30. There will be fewer treasuries issued even though demand stays strong.
So in summary, there’s no doubt that the US economy is gaining momentum, but low interest rates are like the fuel of the engine, and rates can’t rise considerably because of the five reasons above.