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Investors Can’t Hide From Higher Interest Rates

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Investors can’t hide from higher interest rates

By Irwin Stelzer

(Taken from: The Sunday Times - 18 June 2006)

American Account

GLOOM, turbulence, volatility. This is a small sample of the adjectives festooning the business pages as America reaches what is being called “the end of the era of easy money”. Result: a worldwide “flight to safety”, as investors end their speculation in commodities and in the stock markets of places that they probably can’t find on the map. But as heavyweight champion Joe Louis once said when told his next opponent was fleet of foot, “He can run, but he can't hide.” A knockout followed.


...investors fear a return to the bad old days of stagflation, with inflation rising and the economy sinking. Their fears about resurgent inflation were fanned last week by the release of data that show that in the past three months the core rate of inflation (excluding food and fuel) has risen at an annual rate of 3.8%, far above the 1%-2% that the Fed chairman and his colleagues have been trumpeting as their “comfort zone”.

So, as we have been saying for some time, the Fed cannot stop ratcheting up of rates and will have to go beyond its current “5% solution” if Bernanke is not to be seen as so rattled by recent market turmoil that he throws in the towel and lets inflation get out of hand. The markets are now certain that another increase, the 17th, will bring rates to 5.25% at the end of this month, and are assigning a 50-50 probability to a further increase in the summer.

There is a crowd that traditionally worries about Fed “overshoot” — interest-rate increases that not only slow the economy but throw it into recession — but they are not the only ones on edge. A new crop of Fed critics is abroad in the post-Greenspan land...


...the Fed report noted that the growth of consumer spending has slowed. That, say economists at Goldman Sachs, can be traced to MEW — an acronym with which readers might want to become familiar because they will see more and more references to it.

MEW is mortgage equity withdrawal — the cashing out of the rising equity value of a home. American consumers have loved their MEWs, and used their homes as cash machines to fund their visits to the shopping malls. That process seems to be slowing, partly because consumers’ appetites for new cars and home furnishings have waned in response to high energy prices, which Bernanke last weekend declared to be a permanent feature of American life. A slowing housing market also has knock-on effects on total construction, which in turn is reflected in recent weak employment data. That’s another reason consumers might be ready to tighten their belts.


...Too many Fed governors and regional bank presidents — about a dozen at last count — have spoken out in recent days to join Bernanke in signalling that investors have at least one, and probably two further interest-rate increases in their futures. That will slow not only the American economic locomotive, but the economies it drags along. Not enough to trigger a recession in a still robust economy. But enough to keep investors on the edge of their seats.

Coming to a country near you soon! ;)

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