Buttonwood: Same old song

IMAGINE that, ten years ago, a group of economists had been made privy to the key American indicators at the start of 2015. They would have been told that GDP grew at an annualised 5% in the latest quarter, that unemployment was 5.8% and falling, and that headline inflation was 1.3%. What would have been their forecast for the level of short-term interest rates today? Perhaps 3%? Or 4%?It is a fair bet that no economist would have predicted the actual level of interest rates of 0%-0.25%. Those low rates are the key to understanding the outlook for markets in 2015. The Federal Reserve has kept rates so low because it frets that a premature tightening of policy may damage an economy that is still bearing the scars of the financial crisis of 2007-08. Perhaps 2015 will see the first rate increase, but unless there is a surge in inflation (which few expect) the Fed will proceed very cautiously. Elsewhere, it seems highly unlikely that either the European Central Bank or the Bank of Japan will tighten policy in the next 12 months.This background helps to explain why investors are entering the new year in optimistic mood. A poll of British fund managers…

Link to article: www.economist.com/news/finance-and-economics/21637380-forecasts-2015-look-remarkably-forecasts-2014-same-old-song?fsrc=rss%7Cfec

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