It’s Damage Control for Consumers Now

The head of the largest bond fund in the world, Pacific Investment Management Co., said on Friday that he believes the bear market in bonds is over. That’s Bill Gross’s way of saying interest rates won’t be going up any more.

Gross was probably looking at the numbers released by the U.S. Labor Department on Friday that revealed the U.S. added fewer jobs in June than most had expected. The U.S. economy added 121,000 jobs in June, below the 175,000 new jobs forecast by analysts.

Weak job growth is another indication that the U.S. economic machine is slowing. And people like Bill Gross assume that enough “poor” economic news has been issued of late to deter the Fed from announcing another interest rate hike at its next scheduled meeting.

No one has a crystal ball to determine how high interest rates will move in the world’s largest economy. There is one camp, however, with members like Bill Gross, that believe the Fed cannot move interest rates higher because the economy is already getting too soft.

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There is a second camp that believes the Fed has no choice but to raise interest rates because inflation management is the Fed’s prime target. A third camp believes not only that rates won’t rise again, but also that rates will not be moving lower either because of the weak American currency. Move interest rates too low, and the U.S. greenback may just collapse.

Whether rates will move higher or not at the next Fed meeting, my opinion is that the damage has already been done to the U.S. economy. With a prime lending rate at 8.25%, there is no doubt businesses are incurring higher interest expenses at the cost of profits. With a 30-year fixed mortgage now at 6.37%, up from 5.18% only a year ago, there is no doubt U.S. consumers are feeling the pinch.

My simple message today: Interest rates in the U.S. have gone up too far already… the damage to businesses and consumers has been done. It’s not just a matter of how high rates will go, but a matter of how consumers, with a huge debt burden, will cope with higher rates. My bet is that it will be far from easy sailing in the years ahead for the U.S. consumer. U.S. consumers are already in damage control and that means a soft economy and soft stock prices for major American corporations.