Don't Count On Interest Rates Rising Anytime Soon

Don't Count On Interest Rates Rising Anytime Soon

Michael Kramer  | Apr 03, 2020 08:36

This post was written exclusively for Investing.com

Yields are likely to remain low for the foreseeable future as the velocity of MZM Money Stock falls to its lowest level in modern times. The inflation gauge is likely to drop even further as economic growth in the U.S. slows, money printing ramps up and GDP shrinks.

The U.S. economy appears to have taken a severe turn for the worst, based on some of the regional data on business activity reported by Federal Reserve banks, such as New York, Philadelphia, Kansas City, and Dallas. The readings, in most cases, have been about the same as or worse than levels in 2008 and 2009. It could suggest that the economy has started to declines very quickly.

The quick downturn in the economy has resulted in the Federal Reserve launching massive quantitative easing measures and cutting the Federal Funds rate to 0. Additionally, Congress passed a $2 trillion relief bill to help bridge the gap as the economy shuts down due to the coronavirus outbreak.

Velocity of MZM Money Stock

Velocity Slows

The velocity of MZM fell to about 1.28 in the fourth quarter of 2019, as the growth of the MZM Money supply outpaced GDP. By the end of the fourth quarter, the MZM Money supply had reached $17.6 trillion, while the U.S. nominal GDP climbed to $21.7 trillion. It resulted in the velocity falling to its lowest level since the late 1950s. In a time where the creation of money seems to be happening quickly, and the GDP is likely to contract, it appears logical to conclude that the velocity of MZM will likely continue to drop, slowing the pace of inflation and keeping a lid on interest rates.

Economic Downturn

It’s hard to deny that the economy is slowing materially; the only question is by how much it is slowing, and how long it will last. Data from the New York Fed showed that the Empire State Manufacturing Survey business activity declined to its lowest levels since the 2008-2009 recession. Meanwhile, the Kansas City Fed’s Manufacturing Activity declined to its lowest levels since 2009 as well.

U.S. NY Empire State Manufacturing Index

(U.S. NY Empire State Manufacturing Index)

Job data has also been weakening in the U.S. with the ADP employment report noting through March 12 there had been job losses of about 27,000. That number could have been much worse, had it not been for a significant influx of hiring for health care workers, which increased by 48,000. Initial jobless claims also increased to around 6.6 million on April 2 and are likely to continue to rise in the weeks ahead as more people file for unemployment insurance.

Strong Correlation

The declining economic activity is likely to result in a significant decline in the GDP. On April 2, the congressional budget office noted that the second-quarter GDP would decline by more than 7% while unemployment rises beyond 10%. Should the economy contract as the data is beginning to suggest, that will put downward pressure on the Velocity of MZM, and in turn, help to keep Treasury rates low. A chart of the velocity of MZM and the 10-Year Treasury shows how closely correlated the two are over a long period.

MZM/10-Year Treasury Chart

As the outlook for the U.S. economy declines and the Fed and Congress embark on policies to support the economy. The velocity of MZM appears it only may continue to head lower, and that rates will only follow.

Michael Kramer

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