Will US see an interest rate of 7 percent?

Prof. Dr. Edward Gramlich is a former member of the board of the US Central Bank, the Federal Reserve (FED). Gramlich says that the FED has increased interest rates in order to keep inflation under control and that interest rates could rise to 6.5-7 percent. He says that the rises in interest rates will not trigger a global crisis.

In the period between 10 May and the end of June there was more turbulence on global markets than there has been for several years. Major falls were triggered by the announcement that the FED would continue with its policy of raising interest rates and lasted for more than a month. In addition to the stock exchanges in Europe and America, all of the bourses in the developing world from Asia to America also declined and currencies underwent a sharp devaluation.

During this important period everybody’s eyes will once again be on the leading central banks, particularly the US Central Bank, the Federal Reserve (FED). Will the hikes in interest rates continue and if they do how high will they rise? What impact will these new developments have on global liquidity and what will happen in developing countries? In fact, there are also many more questions…

Capital found the right person to whom to ask these and many other questions everybody is interested in learning the answer to. Prof. Dr. Edward Gramlich, who was a member of the FED board during the Alan Greenspan era, analyzed the new era and the effects of the interest rates for Capital readers.

Will There Be A Contraction In Global Liquidity?
I think there will be a contraction in global liquidity because previously we were in a period when there was a lot of liquidity. Interest rates were low in the USA and in Europe. While in Japan interest rates were at zero percent. Many central banks created a significant volume of liquidity. This could not continue. Now the USA has returned to a more normal situation and Europe has begun to return to a more normal situation. Indeed, rates have even begun rising in Japan. I mean, the era of excessive liquidity is over.

Are The Fears Of Inflation Justified?
I think that the central banks now know how they can keep inflation under control. I hope that they won’t make any concessions when it comes to keeping inflation under control. If they don’t, then inflation won’t get out of control.

Why Does The Fed Want High Interest Rates?
The reason why they have done this is that there were concerns a few years ago that prices were falling. If prices in a country fall then the failure to arrest the decline can create serious problems. A few years ago the FED was very concerned by such a situation. For this reason it suddenly reduced interest rates to one percent. Since then it has slowly raised them back to their former normal level. Now they have almost returned to normal. Maybe there is still a little way to go. But ultimately this is the reason for the rise in interest rates. I mean, the return to their former normal rates. In fact, there are no targets for interest rates. Such targets as exist are related to inflation. Because they want to keep inflation at a certain level, namely at around one or two percent. I mean, the rises in interest rates are necessary in order to keep inflation at this level.

Will The Hikes In Interest Rates Stop?
Many people have speculated about this. I don’t want to speculate. I don’t want to talk as if I have some information about this. But what I can say is that many people think that the FED needs to raise interest rates a few more times.

If you bear in mind that interest rates were at 6.5 percent towards the end of 2000 then we can say that rates will perhaps rise a little higher than that. A level of 6-7 percent will be enough to check inflation. I think and hope this is what will happen. But you can never be sure that this is what will actually happen.

Özgür Gözler
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