Over the past week, two major Wall Street Investment banks have come out warning that interest rates are going higher soon. Both JPMorgan Chase and Citigroup are forecasting that average interest rates for the world’s developed economies will rise to minimally one percent. Not only would this leave the world of zero interest rates behind, but it would represent the biggest interest rate increases in over a decade (since the year 2006).
Policymakers are running the risk that they will set off a decline in financial markets or even upset consumer and business demand. The threats these simultaneous interest rate increases represent remind you why you need a gold IRA. The yellow metal retains the distinction of being the longest running portfolio hedge in times of financial decline. This is why gold offers insurance and protection during market turbulence. It’s time to think about what gold goes in an IRA.
Interest Rates to Rise as QE Falls
What makes the interest rate increases more dangerous still is the fact that they will be combined with cut backs in the so-called quantitative easing. Central banks like the Federal Reserve have begun discussing their plans to cut back on purchases of assets in recent months.
Now Bloomberg Economics forecasts that these primary central bank net asset purchases will decline substantially from $126 billion back in September down to only $18 billion by the conclusion of 2018. They foresee them turning negative in the first six months of 2019. Director of Global Economics Ebrahim Rahbari of Citigroup explained this with:
“2018 is the year when we have true tightening. We will continue on the current path where financial markets can deal quite well with monetary policy but perhaps later in the year, or in 2019, monetary policy will become one of the complicating factors.”
The likely interest rate increases for mid December start with the U.S. Federal Reserve. They make their decision this Wednesday, December 13th. Incoming Federal Reserve Chairman Jerome Powell told the Senate Committee hearing (that confirmed him) back at end of November that:
“I think the case for raising interest rates at our next meeting is coming together.”
Analysts have accepted that the Federal Reserve will likely raise the rates by one-quarter percentage point. Besides this, Janet Yellen will give her final comments as Fed Chair and offer guidance that still more rate increases will be in the cards for 2018.
This Thursday, December 14th other critical central banks will be meeting to make their final monetary policy decisions for year 2017. The important financial policy meetings include those of the Bank of England, Swiss National Bank, and the European Central Bank.
These three institutions make the rates for around one-third of the global economy between them. Another 11 central banks are making their year end decisions throughout the week as well, making it an important gauge for where interest rates will be heading.
Interest Rates Expect to Increase More in 2018
Interest rates are expected to rise still more in 2018 than they did in 2017 though. The argument in favor of this is the belief that the global economy will grow approximately four percent in the coming year. Central bankers point to improving trade (despite threats of an American-led trade war), declining unemployment, and the probable U.S. tax cut.
Both Citigroup and JP Morgan Chase see average rates climbing significantly in 2018. Citigroup forecasts that the average interest rate in the developed world will surpass its greatest level going back to 2008. They believe average rates will reach one percent.
JP Morgan sees more interest rate increases bringing the developed world average to 1.2 percent. This will be nearly double the interest rates from the average at the end of 2017. This graph shows the anticipated future interest rates for the major central banks of the world:
The two banks also have varying predictions on how many interest rate hikes the major central banks will deliver. Citigroup anticipates that the U.S. and Canadian central banks will increase rates three times for the coming year with Britain, New Zealand, Australia, Norway, and Sweden raising rates a single time.
Meanwhile JP Morgan is more aggressive with its predictions of four U.S. rate increases for the year. The Bloomberg survey of economists also forecasts three American interest rate increases next year. They anticipate these will begin in March.
Not All Central Banks Feel Comfortable With Lifting Rates
It is possible that the global central banks could decide not to raise rates so aggressively. This is particularly the case if inflation remains tame. As of now, the International Monetary Fund forecasts that developed economies’ consumer prices will increase by less than the central bank targets of two percent at a total of 1.7 percent.
Keeping this in mind, some of the major central banks are not comfortable with shaking their economies at all. Analysts expect that both the European Central Bank and the Bank of Japan will choose to hold their interest rate levels steady for 2018.
Then there are the central banks of developing countries who are more worried about economic slowdowns. Central banks from such countries as Russia and Columbia are anticipated to cut their interest rates after the example Brazil recently set.
Higher Rates Present Dangers to Markets
There are dangers that such increasing interest rates present to markets when they begin in earnest. Deutsche Bank’s Chief International Economist Torsten Slok sees this “quantitative tightening” affecting global markets starting in Q2 of 2018. He believes that by this point the European Central Bank will have announced it is set to stop buying bonds.
So far there has been calm as head central bankers have begun to decrease the flow of cheap money. Yet this will not last forever. In December the Bank of International Settlements issued a warning against the key central bankers creating a false complacency with investors. This could cause a significant correction to the yield of bonds. Investec Economist Victoria Clarke has warned about the danger with:
“We see 2018 as a pretty key year for normalization. It’s going to be quite challenging for central banks to get the balance right on how much to do.”
It is already a concern that global investors do not see so many interest rate hikes coming as do economists. The market only expects two interest rate hikes for the U.S. in the coming year, as the fed funds futures contracts show. A growing danger is that there may be an inversion to the bond yield curve. This occurs when short term borrowing costs rise over longer term ones. When this happens, it has predicted recessions in the past.
Gold Is Your Best Protection Against Recession and Falling Markets
The threat of rising interest rates has posed a danger to the fledgling economic recovery that has been underway for the last nearly decade. Analysts and economists have warned time and again that withdrawing the easy money and zero interest rates would remove the support that has kept markets soaring so far.
When stocks and bonds inevitably decline and recession returns, you will need a dependable asset to hedge your portfolio. Gold is that asset that has proven itself countless times over the centuries and millennia. Gold outperforms in market crisis. Now that you know why to invest in gold, you should consider the best ways for how to invest in gold.