Monday, June 4, 2012

Is It Time to Start Thinking About Higher Rates?

I think it’s clear that the Fed has no intention of altering monetary policy any time soon (don’t worry, equity investors, the Bernanke Put is more than intact!). However, some foreign central banks are certainly starting to feel the pressure. The Economist believes we could see rate hikes in the U.K. sooner than many believe (this year, in fact). If the seasonal trends in energy prices continue, we might even see the Fed begin shaking in its boots. Ben Bernanke has created something he is quickly losing control of. Not only has he failed to control interest rates, but he has failed to control the madness of crowds.

I still think this environment is ripe for a commodity bubble heading into the summer, and there is nothing the Fed can do to contain it. The Bernanke Put is in and can’t be removed without risking an equity collapse. On the other hand, if the Fed maintains it, we create an environment that is ripe for malinvestment and speculative bubbles. Damned if they do and damned if they don’t. Ben Bernanke plans to do. The Economist elaborates on its outlook:

Our latest global forecast, published today (free registration required), sees global growth expectations little changed from last month. However, rising inflationary pressures — fuelled by soaring commodity prices—will bring about interest rate hikes sooner than we previously expected.

Source: The Economist

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