Tags: Lawrence Summers | Federal Reserve | interest rates | economic growth

Lawrence Summers: Interest Rates Will Stay Low for Years

By    |   Monday, 16 June 2014 10:59 AM

A combination of slower-than-normal economic growth and increased savings will keep interest rates below historical levels for years, says Lawrence Summers, a former top economic adviser to President Obama.

Summers, now a Harvard professor, has argued for months that the U.S. economy may be in a period of "secular stagnation" characterized by sluggish economic growth.

GDP has expanded at an annual rate of only 2 percent since the end of the Great Recession in June 2009. That compares to a growth rate of more than 3 percent following previous recessions.

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In addition to that slow growth, households and businesses across the globe are saving more money, allocating much of it to bonds and thus pushing interest rates lower, Summers told The Wall Street Journal.

"I suspect unless circumstances change, fed funds rates may well average less than 3 percent over the next decade," he said.

The normalized federal funds rate historically is about 4 percent. The Federal Reserve's current fed funds target stands at a record low of zero to 0.25 percent.

The low rates will increase the danger of financial bubbles, because investors will snap up assets likes stocks or real estate to garner higher returns, Summers noted.

Bill Gross, chief investment officer of Pimco, agrees with Summers' fed funds forecast, telling Bloomberg last month that he sees the rate around 2 percent in 2017 and 2018.

But Gross isn't as worried about bubbles. "If 'The New Neutral' rates stay low, it supports current prices of financial assets," he wrote in his June investment outlook. "They would appear to be less bubbly."

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A combination of slower-than-normal economic growth and increased savings will keep interest rates below historical levels for years, says Lawrence Summers, a former top economic adviser to President Obama.
Lawrence Summers, Federal Reserve, interest rates, economic growth
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2014-59-16
Monday, 16 June 2014 10:59 AM
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