Economics: The Fed Is Right - We Need More Interest Rate Hikes

(Drivebycuriosity) - Last week the Federal Reserve hiked her interest rate another quarter percent point, as expected. Much more interesting were the comments & announcements by Jerome Powell. The Fed chairman predicted another hike by December and signaled three more for 2019. The Fed also dropped the phrase that her policy will be “accommodative.”

I appreciate the announcement. The US economy is growing about 3% and doesn`t need more monetary stimulation, which has been described by the term “accommodative". And inflation is already cooking up, driven by spiking oil prices, rising rents & climbing medical cost. Today oil costs about 40% more than a year before and the oil prices have almost tripled since begin 2016 (charts below). Hedge funds and other speculators are using (still) cheap money and are pumping it into financial futures on oil prices. The risk is growing that the oil speculation is getting out of control - like in 2007/08 as oil prices jumped above $140 - and could cause again a severe recession.

The Fed is doing the right thing by fighting against inflation relatively early. If the central bank responds too late to rising inflation rates they would have to fight harder to break the inflation mentality, meaning sharp interest rate hikes. Recessions are often caused by the Fed who is trying to get inflation under control.

I don`t expect that the signaled 2019 interest rate hikes will cause another recession and I doubt that they will end the bull market for stocks. I assume that the necessary interest rate hikes will be moderate because inflation will be constraint, thanks the early response of the Fed (yesterday`s hike was the eights in this cycle) and the technological progress - including Internet - that keeps prices at bay. And the climbing US oil production (fracking) should slow further rising oil prices. Company earnings are growing swiftly (explained here ) and should overcompensate the negative impact of climbing interest rates.

History shows that stock prices & interest rates can rise happily together: The Bank of America Merrill Lynch (finance) notices that “the 1950s was a period of higher stock prices and higher US interest rates. The US 10-year yield bottomed near 1.5% in late 1945 and the S&P 500 remained firmly within its secular bull market until yields moved to 5-6% in the mid 1960s. The S&P 500 rallied 460% over this period.”