OK investors, hands up if you think the Fed is going to raise interest rates and slow down the surging economy this year. Instead of putting your hand up maybe you should hit the “SELL” button on your computer. Hit it again. And again.
Surprisingly — to us — there has been lots of “hawkish” comments from Fed officials over the past few weeks, with some officials indicating that it is time to start tightening again. These officials are worried about inflation, and want to fight it before things get out of control.
With TARP, TALF and all the other stimulus programs, the Fed’s balance sheet now stands at US$2.4 trillion. The Fed is now the world’s biggest holder of treasuries, surpassing China’s holdings.
Also, in case you haven’t noticed, the United States is involved in two wars and is, more or less, starting a third in Libya. It has also vowed to help Japan recover from its recent natural disasters. It all costs more money than the United States has hopes of ever having.
So, U.S. government spending continues to go way up, and U.S. tax revenue is not exactly surging. The Fed holds trillions in bonds. The unemployment rate remains high, at 9%. U.S. housing prices have started to fall again, as indicated by the recent Case-Shiller report, showing a 3% house price decline year-over-year. Consumer confidence in March fell by 10 points, the 10th biggest drop on record.
Nope, economically speaking, things are not good. Sure, commodity and stock prices are rising. But no jobs are being created, house prices are still falling and consumer spending is anemic, at best. With this economic backdrop, let’s look at the reasons why the Fed might raise interest rates. There are really only two reasons: to slow down a surging economy and to slow down inflation.
I think you will agree with us that the economy is clearly not “surging”. GDP growth, while recovering, is still barely above where it needs to be just to cover population growth. So the only reason the Fed would raise rates right now is to fight inflation.
Rising rates, however, have the following impact to the economy: They reduce investment by companies; they raise mortgage rates; they reduce hiring; they hurt the stock market; they reduce consumer spending; they reduce borrowing; they lower asset prices.
With the state of the economy, do you really think the United States can withstand the negative impacts of rising interest rates right now?
Not a chance.
The Fed knows this (at least Bernanke does) and in our view there is a zero per cent likelihood that rates are going up anytime soon.
Surprisingly — to us — there has been lots of “hawkish” comments from Fed officials over the past few weeks, with some officials indicating that it is time to start tightening again. These officials are worried about inflation, and want to fight it before things get out of control.
The Fed removes the band-aid that is QE2 on June 1. But after US$600-billion sunk into buying up treasuries to hold down bond yields, the legacy of that dramatic intervention and how it will play out in the second quarter is being hotly contested. Read our Q2 Outlook package Saturday in the Financial Post and at financialpost.com
In our view, these hawkish Fed officials simply just don’t get it. First of all, for the U.S. government at least, inflation is good. In fact, inflation is just about the only thing that can help the U.S. in its current situation. The United States has borrowed so much money from foreign investors, with no realistic way of paying these investors back, that it now becomes prudent for the government to pay back its obligations with devalued, printed money.With TARP, TALF and all the other stimulus programs, the Fed’s balance sheet now stands at US$2.4 trillion. The Fed is now the world’s biggest holder of treasuries, surpassing China’s holdings.
Also, in case you haven’t noticed, the United States is involved in two wars and is, more or less, starting a third in Libya. It has also vowed to help Japan recover from its recent natural disasters. It all costs more money than the United States has hopes of ever having.
So, U.S. government spending continues to go way up, and U.S. tax revenue is not exactly surging. The Fed holds trillions in bonds. The unemployment rate remains high, at 9%. U.S. housing prices have started to fall again, as indicated by the recent Case-Shiller report, showing a 3% house price decline year-over-year. Consumer confidence in March fell by 10 points, the 10th biggest drop on record.
Nope, economically speaking, things are not good. Sure, commodity and stock prices are rising. But no jobs are being created, house prices are still falling and consumer spending is anemic, at best. With this economic backdrop, let’s look at the reasons why the Fed might raise interest rates. There are really only two reasons: to slow down a surging economy and to slow down inflation.
I think you will agree with us that the economy is clearly not “surging”. GDP growth, while recovering, is still barely above where it needs to be just to cover population growth. So the only reason the Fed would raise rates right now is to fight inflation.
Rising rates, however, have the following impact to the economy: They reduce investment by companies; they raise mortgage rates; they reduce hiring; they hurt the stock market; they reduce consumer spending; they reduce borrowing; they lower asset prices.
With the state of the economy, do you really think the United States can withstand the negative impacts of rising interest rates right now?
Not a chance.
The Fed knows this (at least Bernanke does) and in our view there is a zero per cent likelihood that rates are going up anytime soon.
