In yesterday’s post “The Mistake Everyone Is Making About Fed Rate Hikes” I discussed the impact of rate increases on the financial markets given a low economic growth environment.
“Secondly, what David’s analysis misses is the level of economic growth at the beginning of interest rate hikes. The Federal Reserve uses monetary policy tools to slow economic growth and ease inflationary pressures by tightening monetary supply. For the last six years, the Federal Reserve has flooded the financial system to boost asset prices in hopes of spurring economic growth and inflation. Outside of inflated asset prices there is little evidence of real economic growth as witnessed by an average annual GDP growth rate of just 1.2% since 2008, which by the way is the lowest in history….ever.”
While an interesting debate, it is a primarily a moot point given the unlikely scenario the Federal Reserve will raise rates in 2015. This was a point made by Jeffrey Gundlach, via Reuters, yesterday:
“Jeffrey Gundlach, chief executive of investment firm DoubleLine Capital, said on Tuesday he believes the U.S. Federal Reserve will probably not raise interest rates this year, in part because of a lack of wage inflation.”
Just for the record, this was something I discussed back in March of this year stating:
“I spent a few minutes with my friends at Fox 26 Houston yesterday discussing the FOMC’s recent two-day meeting and why the Fed will not raise interest rates this year.”
While I discussed the issue of rate hikes and extremely low annual rates of economic growth in yesterday’s missive, the following four charts go to the heart of why the Fed will not raise rates this year.
Inflation
Interest rates, in general, are a function of economic growth and inflationary pressures. The rate at which individuals and corporations will borrow or lend money is based upon the demand for credit that is driven by the strength of the underlying economy.
