No chance of a rate hike this year. I hope you are right, but I can't help wondering about the risk that the FED may be pushed into a situation where they are unable to control the rates.
The problem is an increasing risk that inflation may kick in. Commodity, energy, material prices are all up and may soon start showing up in CPI, PPI, etc. If inflation spikes, what will Greenspan do if faced with the conflicting goals of tighten money to control inflation and loosen money supply and keep rates low to stimulate investment, stimulate jobs, and stimulate liquidity? I would think that he opts for liquidity at the expense of inflation.
The problem could occur because international investors hold such a significant portion of US debt. I can foresee a scenario where further interest rate pressure occurs as investors require higher dollar returns to compensate them for an inflating, higher risk, US economic environment. If we were sitting in Europe, would we think that a 30 year US no credit risk rate at 4.8% adequately reflects the long term inherent economic, political, and currency risk? I am not sure it does. Liquid, international capital flows so easily today and the declining dollar will add more pressure to the required rate of return for international holders.
I can easily imagine a scenario that Greenspan does a poor job of balancing the need to keep low interest rates (more liquidity) with the conflicting priority of fighting a growing inflation rate (less liquidity). He could easily get behind the curve.
"No chance of a rate hike this year" may be optimistic. The economic environment, sentiment, perceptions, and priorities can change in 9 months. Greenspan may have lost control over the situation. |
