Tuesday, November 10, 2009

Raise rates?

Reports indicate that the Fed's decision to keep rates at these extremely low levels was a result of their concern about the continued tight commercial lending policies of banks. Do they really think this way.

Do they really think that holding rates this low will spur bank lending or that, on the other hand, raising rates 25 basis points to send a signal to the market would cause lending to contract further.

The opinion here is that this is flawed thinking. The contraction of credit markets is a global event. The secondary market for commercial loans and the securitization markets for consumer loans radically contracted last year and the appetite for risk at those prior levels is bust, does not exist, over. The decision to expand the loan market is not made in the executive offices of large U.S. banks and their reaction to minor interest rate changes.

A small rate hike would: give a directional touch of support to the collapsing dollar; be a glimmer of hope to savers living with almost no return on their money market funds; begin to help avoid another speculative bubble in some area that benefits from a necessary search for yield; and be a downpayment on the eventual inflationary pressures that will arise as global commodity inputs eventually force a decline in dollar purchasing power.

View here---the stock market would like it. The traders would choke on it for a day or so but after that it would create a stronger foundation for the longer term.

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