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The implications of the U.S. Federal Reserve's loose monetary policy. Total U.S. debt in 2012 is expected to be $11.58 trillion, with 52% of this in maturities of less than 3 years. The average interest on this is about 2.24% in January 2012, with interest on the debt at about 225 billion in Jan. 2012. If interest rates were to go up in 2014-2017 as forecast by the CBO, an interest rate of 5-6% would result in doubling or tripling the amount of interest on U.S. debt. The U.S. Treasury is financing the huge increase in debt- $5 trillion added in the last four years- through low interest rates and shorter maturities. This stores up large financial risks for the future including calls for tax increases to pay for a sudden rise in the interest on U.S. debt.

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Powell needs agreement of others on Fed Board to set US interest rates August 2025. There is now a divergence of opinion with some Fed members looking to lower interest rates in coming months to aid the US economy as it resets the terms of world trade for a level playing field for all, something that had not happened by the ineptitude of previous presidents.

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Higher inflation and interest rates at 2.2% are having a profound effect on the Japanese economy. Japan is starting a new era of positive interest rates with the first interest rate increase in 17 years this week. Pay raises reached an average of 5.28% in 2023, according to the Japan Trade Union Confederation where the highest for the previous decade was 2.4%. PM Kishida has pursued a course that encourages workers to get needed pay raises. It will affect everything from US mortgages to how much money stays at home and is invested in Japan. Japan holds $4.2 trillion in foreign investment holdings of which $1.1 trillion is in US Treasury bonds. As the differential with US interest rates decreases - varying from 1.5% to 3%- it will increase investment in the Japanese economy and in manufacturing at home. Japan has seen low wages and a hollowing out of its manufacturing sector similar to the US creating a sense of less hope for the future. This shift to investing in Japan is a change for reasons of supply chain reliability and increasing confidence of workers and worker's families in Japan. ...

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U.S. Federal Reserve chairman Ben Bernanke tells the House Financial Services Committee hearings that the Fed will give importance to underemployment, not just the unemployment rate, in making decisions about bond purchases. The unemployment rate could be a false indicator of the labor market if the rate falls below the Fed's goal of 6.5% before raising interest rates, and yet labor markets are still weak because of underemployment. Bernanke said: "There are a number of problems with the labor market. Unemployment is one problem, but long term unemployment and underemployment- and by 'underemployment,' I mean people either who are working fewer hours than they would like or possibly working at jobs well below their skill level- is also indicative of a weak labor market." In this situation of high underemployment combined with low inflation the Fed may hold off on raising interest rates when the unemployment rate reach 6.5%. In Bernanke's words: Reaching 6.5% unemployment "would not automatically result in an increase in the federal funds rate target." Since 2010 financial markets in the U.S., and to a lesser extent worldwide, have looked to U.S. Fed policy for raising interest rates, as guidance on the degree of support for the economy and by extension for markets....

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This exceptional report by Ian Talley in the WSJ cites trade and currency expert William Cline about the prospect of a worsening trade deficit under the Trump administration. With an improving economy, says Cline, the dollar had already surged about 8% beyond its fair market value during the last 2 years under president Obama as the economy improved. After Trump's election it surged another 3%. This makes it likely that the trade deficit could approach 4% of GDP with the stronger dollar. More protectionist policy to support U.S. industry, worsening trade deficits, more trade friction could be expected in these conditions. He does point out that markets may be overestimating what will be spent on infrastructure, and how much interest rates will go up which support a stronger dollar. Yet the fact remains that under an administration that is keen on promoting U.S. exports a dynamic is underway that makes U.S. exports actually less competitive in international markets.

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The US Federal's half percentage point interest rate cut bodes well for stocks and bonds in the US, says this report in WSJ, as it reduces the burden of interest rates on small business that has a part of its debt in floating rates. The default risk component of rates also shrinks for large and small companies. A lot depends on how much the US is investing in manufacturing, in chips and science, in education, in infrastructure that reduces the costs to business and in its industries, which is the ultimate driver of growth. In this sense the Biden administration and Jerome Powell's Fed have accomplished a remarkable deal in the difficult period of the pandemic's four years 2020-2024. Much remains to be done yet this is a big deal, and the next president can leverage these strengths to set the US on the right path, the Way Forward for America.

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Economist Lawrence Lindsey says the Fed has boxed itself and has little choice but to keep interest rates low. Borrowing at the more normal interest rates of 5.7%- which is what it was over the last three decades- and not at the current 2.5%, would mean an increase in borrowing costs for the U.S. government of $800 billion in 2021, says Lindsay. Lindsay bases this on the U.S. debt growing from $14 trillion in 2011 to $25 trillion by 2021, and interest rates going back to normal levels by 2021. Just to put this in perspective Lindsay says it would require all the cuts Republicans and Rep. Ryan are asking for just to pay for the added interest, not even about reducing the size of the U.S. debt. This would be a disaster for the U.S. Treasury, so we're stuck with really low rates. The term used by economists is "financial repression." Savers and retirees will have to put up with low returns. Lowering unemployment is only one aspect of U.S. Fed policy, the other aspect is in the constraints Bernake faces....

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Much of the economic debate by economists in the US takes place separated by walls from the reality of huge inequalities in the country such as half of retirees having zero savings, the cost of living surge, job insecurity, and two third of children in 4th grade no able to pass the ACT test for reading comprehension. Here economists at the US Fed are cited in a discussion about ultra low interest rates that hurt savers and in particular retirees who number 57 million. Ultra low interest rates lead to wasteful use of capital and misallocation of capital in the US, and were largely a result of the effort to correct for the mistakes of the financial industry causing the crisis of 2009. The US was the leading economy in th world and the standards of living in the US were higher during the post war period 1950-1990 that covered the Kennedy-LBJ, Reagan administrations when inflation was accepted at 4% and interest rates were for the most part around 5-8% on average. As Krugman points in a recent NYT column in August 2023 Fed research has been wrong in estimating the right inflation rate for the economy. The best rate for the economy requires knowledge of and careful judgement about the situation of different parts of the American population, of workers and families that are struggling with the cost of living, and half of retirees with no savings. ...

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Stephens of NYT shows the effects of zero interest rates in shifting trillions of dollars of wealth away from the middle and lower classes in America. Zero interest rates in 2009 were a response to a financial crisis created by the irresponsible behaviour of Banks and financial firms in the US. The loss of manufacturing and shipping of jobs overseas added to the effects of zero interest rates in increasing poverty and deprivation in the US.

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After rapid growth during 2021 home sales in the US are expected to decline by 10% in 2022, according to the National Association of Realtors. The rise of remote work and homebuyers seeking more space had pushed up sales in 2021 with low interest rates. Mortgage rates are now up to 5% in an higher interest rate environment having an impact on home sales. Higher median home prices with the median price of a home up 15% in March compared to the previous year, and 9.5% lower inventories are also having an impact.

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Frances tax system places 40% tax on single earner family with 2 children compared to 20% in the US. France debates how to pass the budget and how to meet budget shortfalls in revenue, where to tax. France's top tax bracket is already at 55%, the second highest in Europe, which does not make the job of setting taxes easier. Additional 1.9 billion euros was to be raised by raising the tax rate for families that had tax liability of 20% if they made over 250,000 euros. This has raised 400 million euros only in 2025. This editorial in the Washington Post is critical of the French tax structure and says it is not just the rich who end up with higher taxes. It says that the average French single worker gets to keep only 53% of income after taxes, whereas American average single worker who gets to keep 70%. The extra 20% could be what the American worker pays for health care if as in some cases health care has become so costly in the US as to cost more than a mortgage, as reported in the WSJ in January 2026. Can government buy healthcare more efficiently and distribute it than families on their own. In the case of pharmacy products would removing the power to negotiate  prices with pharmaceutical companies conducted in government run by special interest groups as happened under US president Bush make it so expensive to buy pharmaceutical products that the advantage of smaller taxes is destroyed by a perverse healthcare system run by special interest groups with help of lobbyists. This is just to show that yes the US tax system with lower taxes can fail when other things go wrong in managing crtical costs such as healthcare and housing.   ...

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Low interest rates are boosting the U.S. housing market. Lenders made $1.1 trillion in home loans in the second quarter 2020. Mortgage rates fell below 3% in July. About $2.5 trillion in home loans were made in 2019. Refinancings are up 200%.

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The US central bank, the Fed, holds interest rates steady at 5.25% to 5.5%, while holding out the possibility of increasing rates in the future. Overall price increases have declined to 3.4% since September 2023, from 7% earlier, allowing the Fed more room to pause increase in interest rates to fight inflation.

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The US dollar is rapidly appreciating against currencies such as the Indian rupee, the Japanese yen, the euro and the pound. The aggressive interest rate policy in the US and investor sense that the US central bank will take action against inflation is one reason the US dollar is stronger and will continue to strengthen in coming years. The weakness of emerging market currencies, the Bank of Japan's policy to continue keeping interest rates low, and the stronger US economy vs the European economy as Europe struggles with a war and cutoff of energy supplies from Russia, are other reasons for a stronger dollar in 2023 and beyond.

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Hilsenrath describes how the Federal Reserve missed the signs of the mortgage financial crisis of 2008, the bubble economy, and how low interest rates and other actions of the Fed to rescue the economy led to a situation which hurt savers. The lack of a serious plan for homeowner rescue as part of the actions by the government further hurt the working and middle class. The rescue also lacked credibility because the banks ended up becoming bigger than they were, and no action was taken in the U.S. which had been pushed by the U.S. in similiar situations overseas- for example on South Korean banks for overborrowing during the 1997 Asian financial crisis.  At the 2014 Boston Fed sponsored conference on Inequality, Fed chairman Janet Yellen described what she called the largest inequality in the U.S. not seen since the 19th century. The average net worth of the lower half of the distribution, said Yellen, of 62 million households, was $11,000, and a quarter of them had zero net worth. These were the shocking statistics that propelled two unlikely outsiders forward- Donald Trump to the Republican nomination for president, and Bernie Sanders who coming close to getting the Democratic nomination settled for a big part of setting the Democratic agenda supported by nominee Clinton in 2016. ...

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U.S. Federal Reserve chairman Bernanke, says the Fed will keep interest rates low till unemployment reaches 6.5%, as long as inflation remains at about 2%. If unemployment reaches 6.5%, and this is because more people are dropping out of the labor market, he will take this into account. If unemployment stays high the Fed indicated in its statement that it would tolerate a higher inflation of 2.5%, as long as the longer term outlook was for inflation to be at 2%. Bernanke said this doesn't mean monetary policy is on autopilot, because the Fed will watch conditions carefully and will leave room for flexibility- keeping an eye out for new asset bubbles that could develop, and monitoring labor market conditions and inflationary pressures and inflation expectations. If inflation falls well below 2%, or unemployment rate falls mainly because of people dropping out of the labor market, the Fed may continue to keep interest rates low. This policy was announced as U.S. fiscal cliff deficit negotiations continued in Dec. 2012 with one scenario being considered by both political parties being going over the Jan. 1 deadline before coming to an agreement. Bernanke pointed to this, saying "this is a major risk factor right now." The Fed's activist policy in economic policy has given financial markets and business a measure of stability not provided by government and Congress. Fed policy is to buy $40 billion of mortgage securities, and $45 billion of long term Treasury securities for each month in 2013. It will fund the purchases by adding reserves to the banking system, which is to say that it will print money to buy more bonds. This is a major decision by the Fed in that the Fed has shied away from unemployment targets in the past. Bernanke described this action as a new"automatic stabilizer" in the U.S. financial system- if unemployment rises investors know this pushes the Fed's interest rate increases further down the road and would drive interest rates down, if unemployment drops sooner than expected, investors anticipating Fed's rate increases would drive long term interest rates up, to keep stable growth....

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Bond investors are looking to Japan for clues after the U.S. credit downgrade and two years of zero interest rates. William O'Donnell, chief Treasurys strategist at RBS Securities sees similiarities with what happened in Japan- short term rates near zero and long term rates headed down. strategists see the U.S. 10 year Treasury note dropping to less than 2%, from 2.23% today. Japan's 10 year Treasury note yields 1.05%. O'Donnell's forecast is for 10 year rates to be at 1.70% by mid-2012.

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Central banks for the European Union, US and Britain show slight divergence in their approach to inflation. The Bank of England's Bailey increases interest rates in UK to 0.25% from 0.1% a slight increase to signal its direction more than a serious interest rate increase. In the US Fed chairman Powell indicates an intention to make 2-3 rate increases  in 2022 if the conditions require action. In the European Union Ms. Lagarde of the ECB will taper purchases to 20 billion euros a month later in 2022, and keep interest rates at minus -0.5%. The British pound and the euro gained slightly as a result. 

Supply chain issues and energy prices are a big part of the current inflation increases which were described as transitory by Mr. Powell. The persistence of this inflation led to recent moves by the central bank. At some point these pressures would ease leading to a long term policy approach that pushes for a robust economic recovery.

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Should inflation be set at 2% or 3-4%? This decision affects jobs and zero interest rates hurt what retirees earn on savings.  Krugman says Americans were better off during the period under presidents including Kennedy-LBJ, Reagan right up to 2008 when interest rates were between 5-8%, and inflation of 4% was considered to be acceptable. Consider that about 90% of American retirees have savings of less than $100,000, and 50% have no savings at all after two decades of near zero interest rates. Krugman points out that Fed 2% inflation targeting is a mistake because the research is wrong and inflation of 2% gets you to near zero interest rates a third of the time, not 5% of the time as US Fed research incorrectly shows. Financial crises such as 2009 from lack of regulation of financial institutions and laissez faire policy led to zero interest rates that hurt average Americans.

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The US added 167,000 jobs in July 2023 from a month earlier, according to the Labor Department, less than 200,000 anticipated. Higher population numbers and higher labor force participation rates offset the increasing  number of retired people in the US. More people added to the population from immigration and more younger people participating in prime age under 54. This means the US is where it would like to be with the Fed not having to increase rates that much in coming months, says Justin Lahart of WSJ. The Labor Department increased its estimates of population by 867,000, and the labour force participation for prime age is up to 84%. These are good signals for the US economy, that there is room for more jobs growth and income growth with an unemployment rate at 3.5%, and less need for increasing interest rates by the Fed.

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As inflation eases and job growth continues in the US, and to a lesser extent also in the European Union, there are different opinions on why this is happening. One camp says that the surge in inflation was from temporary supply shocks. Once these shocks abated and supplies came back into the market the situation has eased. Central bank increase in rates played a smaller part in easing inflation say these experts. With interest rates up on loans there is less demand for cars in the US that leads to sellers having less pricing power. The other camp says the increase in interest rates at consecutive meetings had a strong impact on expectations of inflation. Higher interest rates played apart in cooling demand for cars and home purchases.

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The U.S. central bank, the Federal Reserve, lowers interest rates by lowering the federal funds rate to a range of 1% to 1.25%. A drop in consumer spending, in travel, tourism, and the worldwide impact on supply chains in manufacturing, is expected to reduce growth. The move was intended to offset this.

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The European Central Bank follows the US Federal Reserve in raising interest rates. The ECB raised rates by half a percentage point. The Fed earlier raised rates by three quarters of a percentage point. The effort is to tackle inflation before it takes root in US and Europe.

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Alexandra Stevenson provides this insightful glimpse into a highly inflated property market. Microflats in Hong Kong of 275 square feet, smaller than a bedroom, sell for $722,000. Smaller flats of 165 square feet are planned by developers. Since 2003 property prices are up 300% in Hong Kong. Experts see another fall in prices similiar to the one in 2003 during the Asian financial crisis. Mainland Chinese investing in Hong Kong flats have never experienced a collapse in prices. Hong Kong mortgage rates are low, about 2%. Experts see a rise in U.S. interest rates affecting buyers, as Hong Kong interest rates are tied to U.S. interest rates. With low rates on savings accounts, savings are going into an highly inflated unsustainable property market. One estimate shows 41% of household wealth in China is tied up in the property market. A downturn in prices could lead to a large decline in consumer spending. Nicholas Lardy of the Peterson Institute of International Economics sees China not immune to the kind of housing price collapse that hit the U.S., Spain and other countries in the last decade....

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WSJ offers ideas on retirement investing when faced with very low interest rates as in U.S. and Europe.