On Fed rates

I raised an eyebrow upon reading a brief article from the WSJ which ponders a rate hike sooner than many expect.

After that report, the fed-funds futures market — where traders wager on upcoming Fed moves — began pricing in a possible interest-rate increase as soon as December. That market put good odds on central bankers raising fed funds to 1% by May and to 1.5% by next August.

See entire news piece here.

The Fed has reiterated that rates will be kept low for an extended period of time.  While you have data which create some semblance of a recovered economy, there are still a couple of troubled areas that will exert some downward pressure on economic growth. There’s commercial real estate and there’s consumer loans, which the WSJ looked into for an article today.

Despite an uptick in consumer saving, debt levels have only barely begun to come down. Even after the recession ends, economists expect the gradual reduction of the nation’s massive consumer debt to take years. In the meantime, they are warning that the economic-growth surge expected for the second half of this year could be followed by slower growth and a softer stock market in 2010.

The article adds that even after debt levels have seen a big drop from the peak of 132% at the end of 2007 to the current level of 124%, it is still a big jump from the 69% level of debt-to-disposable-income in the mid 80s.

Even if we see a pick-up in demand and perform a walk out of the contraction phase, hiking rates so soon could easily render the other developments pointless. Consumers are still recovering and still in the middle of deleveraging and fixing their own balance sheets.  Just as many economists have argued, a change in rates so soon could lead us back to a recession.  With that said, the same report from the WSJ cleverly pointed out that the central bank has put forth a lot of unconventional policies and these could be the first in line before the traditional Fed funds rate are touched.

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