Written by Norman Isaac Mwambazi

Federal Bank President Evans expects interest rates to be kept at near-zero until 2024

As investors increased the volume of their stock trading after Pfizer announced their breakthrough COVID-19 vaccine over a fortnight ago …

As investors increased the volume of their stock trading after Pfizer announced their breakthrough COVID-19 vaccine over a fortnight ago hoping that the economy is about to recover from the effects of the pandemic in the near term, the Federal Reserve Bank of Chicago President Charles Evans has a rather different view of the economy.

This week on Monday, November 23, 2020, while speaking to members of the Iowa Bankers Association, Evans said that the US economy is going to take some time to recover from the effects of the pandemic; and that recovery could go up to 2014. Between now and then, the Federal Reserve Bank will try to keep interest rates as low as possible, possibly at the near-zero level.

However, Evans said that this situation could change for the better if the country defeats COVID-19 with the help of quick deployment and use of these newly discovered vaccines, which in turn helps the economy pick up in 2021.

“We are going to be in a much better situation,” he said.

Even when the economy significantly improves, the Federal Bank is expected to keep up with the policy strategy it adopted a few months ago that keeps interest rates at near-zero until the economy fully recovers and have inflation drop to 2%.

Evans does not expect inflation to drop to 2% until late 2022 or even 2023 and on that he said, “We are not expecting the funds’ rate to be raised before 2023 – probably late, maybe even 2024 in my opinion.”

Apart from the COVID-19 vaccine, Evans explained that the recovery of the US economy could pick up pace faster if the federal government chips in to help those that lost their jobs due to the pandemic and cannot seem to find new ones in badly hit sectors.

Part of the support expected from the federal government is the second stimulus package that has been discussed by Congress but it is yet to be passed.

HOW DO INTEREST RATES AFFECT STOCKS?

There are two main ways in which stocks are affected by interest rates: directly and indirectly. Here is a summary of how businesses, and therefore stocks, are affected by changes to interest rates:

1. Businesses are directly affected by bank rates because they affect the amount a company can afford to borrow. When interest rates increase, it’s more expensive for companies to borrow capital. If spending decreases, growth slows down, and this can negatively impact earnings.

When interest rates decrease, it’s cheaper for companies to borrow capital with the aim of achieving growth, and this may encourage stock prices to rise.

2. Businesses are indirectly affected because higher interest rates mean less disposable income in the wider economy. This means less spending on products and services, which can again impact revenues and earnings, potentially causing stock prices to fall. Conversely, when interest rates are lower and people are spending more freely, this can be good for business and help to push stock prices higher as the company experiences stronger growth rates.