Friday, March 3, 2017

Economy: It`s Time For Another Interest Rate Hike

(Drivebycuriosity) - I think we will have to get used to this. Stock & bond markets expect that the Federal Reserve will raise her interest rates this month, the third hike since December 2015. I suppose that the Fed is already behind the curve and the markets will have to adapt to more hikes this year.

The global economy is getting stronger and the still extremely low interest rates don`t fit into this environment any more. Last week we learned that the US service sector, which accounts for about 80% of the economy,  "expanded in February at the fastest pace in a year and a half" (marketwatch  bespoke). We also heard that weekly jobless claims dropped to the lowest level since 1973 (when the US population was much smaller bespoke ), a sign that the US job market is already drying out. Europe, China & emerging markets are getting stronger as well.

The US inflation rate is already climbing, fueled by sharp commodity price increases (inflation).  For instance oil costs about 100% more than at begin of 2016. If the Fed would stay as supportive as she is now and would keep interest rates close to zero she would pour gasoline on the sparking fire. Postponing the necessary interest hike would mean steeper rises and higher interest rates in the future - which could cause a new recession

I am convinced that a modest hike won´t stop the global stock market rally. The recent gains are a response to climbing company profits which are fueled by a stronger global economy & efficiency gains. I assume that company profits will in the coming quarters even rise faster because the global economy is speeding up and more efficiency gains. Higher company earnings will overcompensate the moderate rise of the interest rates. Enjoy!

No comments:

Post a Comment