In a word…..nothing.
Why?
Think about it. What is the rational for the Fed raising rates? To slow the economy by reducing credit. Well, I’m not sure about about you but from what I am seeing, that is already happening. One could make the argument and be very accurate in doing so that the current credit environment is far in excess (in its restrictiveness) when compared to the 2% Fed funds rate.
Raising rates in the current situation when placed in a risk reward scenario doesn’t work. The risk that a rate increase would push a teetering economy into recession outweighs any inflation decrease you may get.
We do not need to slow down growth to fight inflation now. When you look at it, we really do not have any real growth to slow down. Q1 GDP was .9%. That really leaves very little room for error.
The singular problem here is commodities driven by demand for food and fuel and stagnant supply. A .25 point rate increase will change neither. When one looks around the world currently we have US gas demand falling over 2% vs last year, China is reducing fuel subsidies (will raise domestic prices there and kill demand) and other nations are considering the same. US consumers are not buying SUV’s and trucks and replacing them with smaller cars and even motorcycles. The effects of those actions on gas and oil (USO) demand will be felt down the road.
Before Bernanke can begin raising rate he needs to be sure the US is not slipping into recession. Despite what people are saying, we are in a recession when we are, not when “it feels like we are” or the media proclaims one. That being said, according to the data, we are not even as of yet in the beginning of one. Now, if Q2 GDP slips into the negative, then we may actually have a modest one. Should it come in flat, then we most likely will escape it. Bernanke will not raise rates until he has more clarity.
This meeting will feature no change in the Fed funds rate and a change in the statement saying future action are tilted towards fighting inflation and a rate increase.
Disclosure (“none” means no position):None
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One reply on “2pm: What Is Going to Happen?”
Exactly right.