The Curious Case of the 0% Interest Rate

Since 2008, the Federal Funds Rate has been near 0%. It’s common knowledge that interest rates will hike…but when?  In July, Federal Reserve chair Janet Yellen confirmed:

"Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy." 

Until recently, it has been widely speculated that the Fed would raise rates in September of 2015. And predictably, the Dow went down by 10 percent this year. But recent circumstances have changed the tides. With a strong dollar, cheap oil, and global recession, the threat of inflation has significantly been reduced.

A Strong Dollar

In his 2012 campaign for presidency, Ron Paul urged people to invest in gold and silver, prophesying an inflation crisis in the near future.  Despite pessimism about US’s monetary hegemony however, the dollar is stronger now than it has been for almost 15 years.  The dollar remains unchallenged as the most reliable currency, and inflation seems to be under control.

Cheap oil

Caused by simple laws of supply and demand (the Middle East’s increased production and Asia’s decreased consumption), oil prices have significantly dropped. A few days ago, oil was priced at less than $40, a startling 50% decline in prices since June 2014.  Since so many of our products are tied to oil, its price drop significantly decreases our cost of living, saving households an average of $750 this year. In short, cheaper oil means lower inflation.

Global recession

January 2015 marked the beginning of Europe’s 1 trillion dollar stimulus plan. June marked China’s infamous stock market crash. August marked China’s currency devaluation by 2%. Even Russia, whose economy is largely dependent on its export of fossil fuels, is heavily affected by decreased oil prices. As other countries lose faith in each other, our dollar has grown stronger: high foreign demand for US Treasuries after China sold $180 billion of its US debt shows the immediate risk of inflation is far fetched… at least for now.

So what does this mean for us?

As news that Feds will be able to procrastinate rate hikes spread across media, the stock market did a quick rebound; oil prices immediately rose >$5.00.

Low interest rates mean that we will be able to keep our cycle of deficit spending and printing money; we will continue to spend without repercussions, borrowing at rates close to 0%. But now we have a safety net: the global economy is largely still dependent on the US dollar as its currency bank. As global economies struggle, faith in the dollar is no longer an option, but an unchallenged necessity.