The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Take A Break, Please

11/17/2018

The Fed has been under increasingly heavy criticism.  No president has ever been happy when the Fed is raising interest rates, but the current one is especially loud.  Now, Wall Street is beginning to complain more loudly as well.

There is a belief that rising interest rates mean falling stock prices, and it’s only logical . . . in the long run.  History tells us that when interest rates are rising due to a strong economy, stocks do fine.  However, there is a “breaking point,’ often said to be about 4 – 5 percent, when stocks will begin dropping.

If you will recall, the Fed has already been increasing interest rates for three years, albeit very slowly.  While current overnight rates are only 2.25 percent, some argue that we are already at the “breaking point,” which has been pushed down by falling global growth and other geopolitical problems.  If so, the Fed should stop raising interest rates now.

The stock market believes there will be one more interest rate increase next month, followed two or three more next year.  With the slowdown in corporate earnings and geopolitical problems increasing, I will not be surprised by another increase in December but don’t expect any increases next year.  If the Fed made that announcement today, the Dow would easily jump 500 points.

I understand why the Fed is pushing up rates — to return to normal and to have enough room to be able to drop rates significantly in the future — but it is time for a break.

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