I stand corrected. The Federal Reserve raised rates by 0.25 points Wednesday.
However, that does not mean it was correct to do so.
If you look at the US economy right now we have a slowing economy as GDP projections of +3% for the quarter are being pulled back to sub 2%. We also have inflation targets that are well below the Fed’s 2% target. Right now it’s at 1.6%.
The US has credit constriction you don’t have to look any future than look at the retail sector to see that the cost of cash is rising and more difficult to attain.
The growing asset bubbles are no longer the sure-fire collateral for extending credit.
So into this environment, the Fed takes it funds rate to a range between 1% and 1.25%. We already see that the consumer has tapped out on credit card usage with available credit at a years low-level, while outstanding balances hit all-time highs.
Student loan debt also at all-time high levels and mortgages for new and existing homes have been flat to slightly lower as rates rise. Car loans are persona non grata for originations and resale in the market due to low quality (think NINJA mortgages) and high quantity.
So why would the Fed raise rates at this time? To put another bullet in the chamber in case it needs to lower them again. To also tell Wall Street to tighten its reigns on credit and bring the bond market inline with other asset classes.
However this rates rise only affects us on the downside. We will pay more for credit and still get little to no interest on our savings.
And how the markets reacted tells you there is little change in either stocks or bonds. It was expected.
Now the Fed also announced the beginning of a plan to unwind its $4.5 trillion balance sheet. These were toxic mortgages and other troubled assets along with plenty of treasury bills and notes.
Now the Fed reinvest those proceeds as they mature, next year it will pare back the reinvestment according to a schedule that will be phased in.
There are lots to say about this and I will address it in the near future, but let’s just say I don’t believe the unwinding will be able to be pulled off beginning in 2018 for reasons I will address later.