Economics: Why We Need More Federal Reserve Interest Rate Hikes This Year

(Drivebycuriosity) - Yesterday the Fed hiked her interest rate by 0.25 percent points to 2% (the second hike this year) and signaled 2 more hikes for this year. I think the raise - and both announced  - are urgently needed - and not too early. The US economy is very solid - as the strong job market numbers show - and inflation is already cooking up. Inflation is driven by spiking oil prices. Today oil costs about 50% more than a year before (charts below). Hedge funds and other speculators are using (still) cheap money and are poruing 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 tripled - 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 usually caused by the Fed who is trying to get inflation under control or sharply spiking oil price spikes.

But I don`t expect that the coming interest rates will cause another recession and will stop the rally on the stock market. I assume that the necessary further interest rate hikes will be moderate because inflation will be constraint, thanks the early response of the Fed (yesterday`s hike was the seventh 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 happily rise 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.”