The Institute of International Finance issued an important warning in a recent report published in the Capital Markets Monitor about the condition of the global economy. The IIF is the world’s only international organization for financial institutions and has over 450 member companies representing 70 countries. The IIF believes that financial markets and major economies have become addicted to very low interest rates and any increase in rates could freeze the global economic recovery in its tracks. The IIF identifies Central Banks as the main culprits, which have pursued policies of “quantitative easing” during the past several years to maintain artificially low interest rates.
This is an important issue which is not getting sufficient attention. The Federal Reserve, which is the Central Bank of the United States, has been very explicit in stating that they plan to continue enacting policies that will keep interest rates at historical lows. These low interest rates have lead to several outcomes—financial markets are soaring to all-time highs as investors put money back into the stock market to achieve better returns on their capital. It has also put pressure on banks to lend more money since they can make a hefty profit paying depositors almost nothing in interest while they charge borrowers higher interest rates.
The problem is that maintaining artificially low interest rates is very expensive and sooner rather than later the Federal Reserve will have a difficult time keep rates so low. When interest rates start going up, much of the economic and financial activity that depended on such low rates will evaporate and could lead us back to a severe recession.
[Institute of International Finance
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