28- Sep2016
Posted By: Terrance
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Chicago Will Continue to Benefit from Low Interest Rates

In late August 2016, the President of the Chicago Federal Reserve was invited to speak in Beijing at the Shanghai Advanced Institute of Finance. Among the topics in his lecture to finance ministers and policymakers from around the world, the Chicago Fed President Charles Evans addressed the current economic climate of short interest rates.

The U.S. economy has been enjoying historically low interest rates since the height of the Great Recession in 2008. In the beginning, the low rates helped banks access cash that was desperately needed after many financial institutions failed and were forced to stop operating. By 2010, the expectations from Wall Street for the three-month Treasury bill were around 4.25 percent, but they have since fallen to just under three percent.

Why Low Interest Rates Are Good for Chicago

According to Chicago Fed President Evans, a move to raise short-term rates will not benefit the U.S. economy at this time. This happens to be a sentiment shared by Stephen S. Poloz, Governor of the Bank of Canada. It so happens that Chicago and Canada have been enjoying good trade relations during the historical period of low rates as nearly 200 Canadian companies have set up shop in the Windy City in the last decade.

Around the same time the Federal Reserve agreed to leave interest rates low, the S&P CoreLogic Case/Shiller Home Price Index was released. This benchmark report, which covers the 20 largest metropolitan areas in the U.S., had some good news for Chicago: local home values have increased by 3.7 percent since July 2015, and this appreciation is the highest experienced in the last two years. Nonetheless, there is still plenty of room for improvement as home price are still 18 percent below their peak levels from a decade ago.

The gains observed in the Case/Shiller Home Price Index are impressive from a historical point of view. Since the collapse of the American housing market, single-family residences in Chicago have recovered by 34 percent while condo units have recovered by 45 percent; this recovery has been boosted by the low interest rates of the last few years, and it needs to continue until the end of this decade.

Unlike other metropolitan areas such as Dallas,the economic recovery of Chicago has not yet come to fruition. Low interest rates will continue to benefit the Windy City until real economic progress can be felt.

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