Is a Fed rate tightening up ahead any time soon? Despite concern that low, real, short-term interest rates are hurting the dollar. Don't count on it.First, the U.S. Federal Reserve wants to encourage banks to lend -- for auto purchases, and especially for business loans -- and nothing prompts banks to lend, even in tighter capital times, like low-interest-rate or zero-interest-rate money.
Second, the U.S. unemployment rate hit 10.2% in October, the U.S. Labor Department announced Friday. Based on current macroeconomic trends, the unemployment rate probably will not begin to decline until early 2010, and it's highly unlikely that the Fed will increase short-term interest rates while the unemployment rate is still rising.
Finally, inflation is non-existent: it's running at about 1.8-2.0 percent at the wholesale level (producer prices) and retail-level inflation (consumer prices) has actually fallen over the past 12 months. Hence, there's little concern about rising inflation in the next 2-3 quarters ahead. The Fed said almost as much, in its November meeting statement, noting that the economic conditions "are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
Monetary Analysis: The U.S. economic recovery is underway, but so far, with 3.5% GDP growth it's mild, compared to growth rates during the initial stage of previous expansions. Demand remains lukewarm, hardly indicative of a recovery that's able to sustain itself. Given low price pressure and tepid growth, there's no need for the Fed to increase interest rates in Q1 2010. To be sure, a weakening dollar stemming in part from the U.S.'s large budget deficit remains a concern, but the latter is Congress' responsibility – and the legislative body can address it by raising taxes and cutting spending.
Why is gold marching higher? Ask the central bankers
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Closing Bell: Earnings working against stocks (BCRX, DELL, DHI, INTC, LEAP, PCS)
Reader Comments (Page 1 of 1)
11-07-2009 @ 5:36AM
al coholic said...
The (distorted beyond belief) govenment inflation numbers might as well be created by a chimp throwing a dart at a board with random numbers. And while he's at it he could probably also throw another dart at a board with unemployment percentages as well.
These ridiculous numbers fly in the face of reality. In fairness to the plebes in government servitude even if they really tried they couldn't make the figures accurate.