Not So Lucky Number 16

The U.S. Commerce Department just reported a surge in U.S. retail sales for January, 2006. Retail sales, excluding autos, were up 2.2 percent last month, the best posting in six years. With autos included, retail sales were up 2.3 percent–the largest one month gain (including autos) since May, 2004.

With the retail sales numbers for January being double what economists had expected, bond prices were hammered on fears the Fed would continue raising interest rates. Now, according to the futures market, 98% of traders believe the Fed will raise rates on March 28 and 68%, up from 56%, believe the Fed will raise rates again at its May 10 meeting.

Yes, in an unbelievable string of interest rate hikes, it looks the Fed will raise interest rates 16 times in a row. Ask a 2004 buyer of a luxury condo or home if they ever thought interest rates would rise back up so fast and they’ll likely be astounded.

Bottom line: the Federal Funds Rate could be at 5 percent be this May, pushing interest rates up to their highest level in years. Is it any wonder the housing market is taking such a beating? After all, between one-third and half of all U.S. mortgages are variable rate.

If the positive numbers keep coming out, it looks like the first quarter of 2006 will be an economic “big” winner for the United States. Some economists are boosting their forecast for U.S. economic growth in the first quarter to between 4% and 5%. If this happens, you can count on interest rates continuing to rise as the Fed tries to cool the economy.

We could be pushed into a situation where it’s “forget the consumers drowning in debt. who told them to load up on so many loans anyway” as interest rates rise in the Fed’s effort to cool the economy. Remember, and as I’ve written many times before, the Fed always raises rates too high or too low in its effort to cool or stimulate the economy to the actual points where booms and busts occur. This time won’t be any different. Only deflation will stop interest rate hikes now.