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I still believe Fed might increase the rates
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I repeated my idea about US rates several times in my column. I think Fed should increase the rates before stock market goes to an unwanted bubble.However although inflation was up for three years and ‘out of comfort zone’ Fed preferred to wait and see. What I see at this point is a stubborn inflation,excess liquidity driving markets and low US dollar currency . Everything is ready for a rate hike. The jobless reports, still growing economy and financial profitability show us there is room for another rate hike.
History suggests U.S. interest rates should fall as the economy weakens, yet some believe higher borrowing costs are inevitable in this downturn.
That's because the dollar's long-term decline is fueling a particularly stubborn strain of inflation that import-reliant Americans will have difficulty fending off.
Moreover, rapid growth abroad is luring investors out of U.S. Treasury bonds and into higher-yielding assets, which also tends to push interest rates higher as they must rise to compete with bond yields elsewhere.
In a sense, the Federal Reserve's string of interest rate hikes beginning in mid-2004 rescued the drooping dollar, making U.S. returns more attractive just as the greenback seemed destined to fall toward record lows.
Since then, the massive U.S. trade deficit has acted like gravity, pulling the dollar back to Earth as America is forced to borrow abroad to make up the difference.
Consumers have kept buying low cost goods produced in Asia and other parts of the developing world. This demand in turn is stoking import prices, generating inflation pressures that are not easily dispersed and keeping Fed officials awake at night.
In this context, the widespread conviction that the central bank's next move will be to lower interest rates could be misguided, as might a rally in stocks that was fueled in part by such hopes.
Long term U.S. interest rates have recently transitioned to a cyclical trend of rising rates from the previous secular trend of declining rates.
Politicians in Washington are well aware of these forces, although their solution -- repeated verbal attacks on China -- smacks of protectionism to many economic analysts.
Both Democrats and Republicans have long been railing about the Chinese yuan, which they say is artificially undervalued and thereby gives the country's exporters an unfair advantage.
But economists say that while China's renminbi currency may indeed be too cheap, any recalibration against the dollar would barely dent the $800 billion annual trade gap.
HOOKED ON IMPORTS
Some argue Washington's logic is best flipped on its head: Voracious U.S. consumers, not the Chinese government, are to blame for the so-called global imbalance.
Already, market interest rates have been climbing as the dollar resumes its fall. Yields on benchmark Treasury notes, which have a maturity of ten years, have climbed by more than a third of a percentage point in just the past two months.
Yet here is one short-term caveat to the likely progression toward higher U.S. interest rates: a slumping housing market.
If it gets much worse, analysts say the Fed might be forced to reduce rates again, particularly if the credit issues facing high-rate mortgages spreads to rest of the market.
The worry here is not just about housing itself, but also its possible spillover on consumer spending, which drives an overwhelming portion of the American economy. Such a development could catch a record-setting stock market by surprise, exacerbating any unwinding of the recent rally.
This would trigger renewed interest in bonds and reverse some of the upward pressure on rates. But with the trade gap showing no sign of abating, all roads seem to point to a weaker greenback. Around the bend, higher interest rates loom. |
| Tarih
: 04.06.2007 |
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Copyright
© 2006 Mert TOKER All Rights Reserved. |
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