Economics: The Fed Is Right For Not Cutting The Interest Rates Soon

 (Drivebycuriosity) - Yesterday the stock market reacted displeased to yesterday´s Fed statement. Shortly after Federal Reserve chairman Jerome Power declared that they don´t intend to cut interest rates in the coming months, stock prices began to slide and the stock market closed in the red. It seems that some speculators had been betting on an interest rate cut and took some money from the table  (seekingalpha).

 I think the Fed is right for not cutting interest rates again. The US economy is growing about 3% and doesn`t need more monetary stimulation. Inflation seems to be constrained for the moment, but oil prices spiked already about 50% since December (chart below) and could - combined with rising rents & climbing medical cost -  cause a return later in the year.  Hedge funds and other speculators are using (still) relatively 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 relatively early against inflation . 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 believe that the stock market overreacted yesterday. 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.”