FRANKFURT, Germany (AP) — Savers will suffer longer with zero returns on their accounts. Home buyers, companies and governments will keep on borrowing cheaply. And questions will grow further about whether central banks are creating bubbles in financial markets by keeping interest rates near or below zero.
The British vote to leave the European Union shook up markets and lowered growth forecasts for Britain and, to a lesser degree, the other 27 members of the European Union. Economists say that means central banks are likely to have to keep in place for even longer their massive, extraordinary stimulus efforts that have helped keep the global economy afloat in the wake of the 2008-9 financial crisis. Some central banks might even have to unveil new stimulus or rate cuts.
FED IN HANDCUFFS
In the United States, the expectation had been that the Fed could raise rates twice this year, with the first hike occurring next month. However, economists now say a Fed rate hike is off the table, not only for the next meeting but for the rest of this year.
“The Fed is handcuffed at the moment,” said Diane Swonk, chief economist at DS Economics in Chicago. “You have got a lot of things moving in the wrong direction in the view of the Fed because of the vote in Britain.”
The Fed is not only concerned about stock market volatility but other fallouts from the British vote, including a further rise in the value of the dollar, which could hurt U.S. exports and further slow the American economy, and falling oil prices, which could worsen the slowdown in the U.S. energy sector.
Many economists have lowered their U.S. growth forecasts by this year by as much as a half-point, now predicting the U.S. economy will likely manage growth of perhaps 1.9 percent this year, with further weakness in 2017.
Swonk said if markets stabilize and Britain and the EU show evidence of resolving differences over an exit plan, the Fed might begin raising rates again in the first quarter of next year.
Other economists believe the Fed will remain on hold for much longer.
“The Fed is looking at potentially years of uncertainty. This will hurt consumer spending and capital investment in the United States,” said Sung Won Sohn, an economics professor at California State University, Channel Islands. “I would put it pretty close to zero probability that we will have a hike in interest rates this year or next year.”
As expectations for a rate hike diminish, rate for 30-year fixed mortgages have fallen from over 4 percent in July 2015 to 3.60 percent this week.
This article was originally posted on the Seattle Times blog. To read more, click here.