Saturday, December 10, 2016

Economy: Why An Interest Rate Hike Is Overdue

(Drivebycuriosity) - Better late than never. The markets expect that the Janet Yellen & her colleagues from the Federal Reserve will raise her interest rates on December 14, the second hike since December 2015. I suppose this step is long overdue and will be followed by more hikes in 2017.

Prices for energy (oil, gasoline, natural gas) are spiking (charts below tradingeconomics). US gasoline costs already 9% more than a year ago ($2.20/2.01 The rallies are partly caused by the typical herding behavior of speculators, especially by hedge funds, fueled by more positive news from the economic front (US, China).

Soon the energy price rally will appear in the official inflation numbers. The core inflation (without food & energy) is already advancing (charts below inflation). A short time ago falling energy prices overcompensated the climbing rents & rising costs for health care and other services. Now energy prices are adding to the inflation rate. The December inflation numbers, which will be published in January, may show a jump, thanks to the higher prices for heating oil, gasoline & natural gas (which we already know).

Abnormal low interest rates were necessary in the years after the recession to encourage investors & consumers. They don´t fit to the current economic environment. The news from the economic front signal, that the US economy is getting stronger (calculatedrisk ) and that China - the second engine of the global economy - is also advancing accompanied by faster climbing prices ( reuters).

If the Fed hikes moderately now, the monetary authority won´t need to fight aggressively against accumulating inflation expectations in the near future. In the past the Fed often responded to late and had to brake inflation expectation by sharply higher interest rates which caused a recession. Do it again Janet!

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