Tuesday, January 20, 2015
Watch the Fed RAISE interest rates
Low oil prices mean that petrodollars are no longer being recycled (oil producers are even sucking money out) into western/US financial assets. Global liquidity will fall, leading to higher borrowing costs, and the Fed will have to look for new support for stock /bond/ asset markets and for the dollar's reserve status. The only tool available to it is higher short-term IRs despite the weakness of the economy (deflation, slow growth, stagnant wages, falling lab force participation). The Fed has made loud noises in this direction lately, and the reduction in US current account deficit gives it some leeway for a rise. Good for US assets, G Sucks and JPM, very bad for the emerging markets (remember 1997) with big dollar-denominated debts and more capital flight.