Why U.S. Interest Rates Will Rise Again This Month
Tuesday, December 7th, 2004
By Michael Lombardi, MBA for Profit Confidential
By now, I’m sure you’ve heard the dismal job report: Only 112,000 new U.S. jobs were created in November — far below the 200,000 new jobs analysts had been expecting.
Combine November’s weak job growth with a soft pre- Christmas retail market and slowing U.S. factory growth and you have to wonder why interest rates are rising.
Four consecutive rate hikes of one-quarter percentage point each this year (on June 30, August 10, September 21, and November 10) by the Federal Reserve are now expected to be followed by a fifth interest rate increase of another quarter percentage point on December 14, 2004. How certain is another rate hike? All 20 of the largest U.S. bond dealers are expecting the Fed to move rates up again when it meets.
The last time the Federal Reserve lifted its Federal Funds Rate five consecutive times was in the period ended May 2000. We all know what happened to stocks since 2000 — they’ve gone nowhere.
While the Fed has always maintained that its main purpose in bringing the Federal Funds rate up or down is to keep inflation in check, inflation is not a threat this time as interest rates continue to move higher. If we take the volatile energy and food elements, inflation is well below 2%. So why are rates moving higher?
Personally, I believe the motive behind the Fed’s actions has never been so clear: While the U.S. obviously favors a weak U.S. dollar scenario, it cannot have its currency experience a freefall. Such a display of a weak currency would make it difficult for the U.S. to finance its daily negative cash of $1.6 billion (yes, that’s how much the U.S. spends every day, compared to what it takes in).
By steadily raising interest rates, the Fed is showing foreigners that investment in U.S. bonds pays a decent, rising return. And because many foreign countries will not be able to increase their domestic interest rates because they want to keep their currency as soft as possible against the U.S. dollar, it’s a way for the Fed to say “yes, our currency is falling… but we’re raising interest rates to prop it up.” The real question is, for how long will foreigners buy the story?
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Tags: Federa Reserve, interest rates, stock market, U.S. bonds
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
