September is a crowded month for economic news. Foremost among them is a series of central bank policy decisions that could have major consequences for the economies in both Europe and America.
The decisions by the central banks will influence the interest rates that households pay on, e.g., mortgages, car loans, and credit cards. Businesses that borrow money in the open credit market will also be directly affected.
Anyone with a desire for lower interest rates can expect good news in the coming weeks.
On Thursday the 12th, the European Central Bank holds its next monetary policy meeting. They cut their three interest rates by 0.25 percentage points back in June, and there is a fair chance that they will do the same at this meeting. If so, the lowest of the three rates, the deposit facility, would fall from 3.75% to 3.5%.
Next up is the Federal Reserve, which has basically already promised to cut its federal funds rate at its September 17th-18th policy meeting. Most analysts expect a quarter-point cut, which would take the federal funds rate from 5.33% to 5.08%. These are often the same analysts that predicted rate cuts in the spring when I—correctly—made predictions that no such cuts were coming.
That does not mean I am correct when I now predict a larger cut than most analysts expect. I would not be the least surprised if the Fed takes its funds rate down to 4.83%. In fact, from my viewpoint, there is only one reason for them not to make that big of a cut: if the inflation numbers for August (due out next week) show a persistently high rate of inflation. I expect a slight decline in inflation—nowhere near the 2% mark but a little bit below 3%—which would give the Federal Reserve the statistical pretext they need for a bigger rate hike.
A day after the Fed announces its rate change, the Bank of England will decide what to do with its bank rate. At its last meeting on July 31st, the BoE’s policy committee voted to cut the bank rate from 5.25% to 5%. The vote was by a slim 5-4 majority, with the minority preferring to not cut the rate. This makes it unlikely that the BoE will make another rate cut as soon as September 19th, but I expect a different outcome—in other words, a rate cut—if the Federal Reserve goes for the bigger cut that I expect.
One week after the BoE’s meeting, it is time for the Swiss National Bank to review its monetary policy. With its lead policy rate currently at 1.25% after two quarter-point cuts earlier this year, another quarter-point cut is possible.
This fledgling trend of lower interest rates is welcome from many viewpoints, but not mine. I have nurtured a hope that the ECB, the Federal Reserve, and the Bank of England would continue to keep their interest rates high. It is possible that they will make no more adjustments than the ones coming this month, but that seems unlikely: their mission right now is to support economies that are showing signs of an emerging recession (the U.S.) or of already being in one (the EU, Britain).
When a central bank cuts its interest rate to support a weak economy, it shifts its policy purpose from keeping inflation down to keeping unemployment down. By the reasoning behind such a policy shift, it was necessary to raise rates to fight inflation—but now it is necessary to cut them to stimulate economic growth and employment.
I sympathize with this cyclical policy reasoning. However, high interest rates could serve another, more long-term purpose. During the past 20 years, businesses and households in the Western world have become a lot more dependent on credit for their regular operations than what is healthy for the long-term solvency of our economy.
Even more than businesses and households, Western governments have grown accustomed to cheap, easy credit. Running perennial budget deficits, the U.S. government and almost every member of the EU have funded regular expenses with borrowed money. The result is in many cases piles of unsustainable debt that are far more of a threat to the future macroeconomic stability of both Europe and America than any private-sector indebtedness can be.
If our central banks would keep their policy rates high, politicians across the Western world would be reminded that the central banks will no longer accommodate their deficits by printing money. As we so painfully learned during our recent experience with high inflation, this monetization of budget deficits is a dangerous practice that we must once and for all weed out of the realm of opportunities for our lawmakers.
However, high inflation is not the only risk that comes with governments having abundant access to cheap credit. Europe has been home to several fiscal crises over the years, with the one in Greece most aggressively etched into our memories. A fiscal crisis can be even more destructive to an economy than high inflation can; in the Greek case, one-quarter of the nation’s economy was destroyed when panic-stricken politicians tried to respond to runaway deficits, runaway interest rates, and glaring cracks in the nation’s very social and political stability.
To make a long story short: over the long run, the difference between high and low interest rates is the difference between sound and sick socioeconomic evolution.
We will not see our central banks take the lead in bringing us back to the era before cheap credit. This is unfortunate, but hardly something to criticize them for. It is not in their charters to provide for national cultural, economic, and political cohesion. That responsibility lies with the elected officials in the executive and legislative branches of government.
I see a significant risk that the ongoing trend of lower interest rates will not be an intermission on our path back to sound money. I see a significant risk that the past episode of high interest rates was the exception; within a year, we could be back to the low, low rates of the early 2010s. This means continually slow growth, expansionist fiscal policy, and households and small businesses shackled by lifelong debt.
