President Obama tipped Fed Chairman Bernanke’s hand earlier this week, declaring that Bernanke has stayed longer in that job than was expected. Not surprisingly, the Fed announced today in effect that interest rates could rise this year.
Much of this turmoil results from fears that the Fed’s low interest rate policy will stimulate a restart of inflation. Never mind the resurgence of the depressed housing market. The result of cheaper mortgage money derived directly from the current, Fed’s contrived low interest rates.
Never mind also that rising housing starts was the essential boost that restored the economy in just about every recession since the 1950’s.
Discomfort with low interest rates is just built into the profile of the financial community. Thus high unemployment, which by definition means lost output, lost income -and lower self-esteem- for the society, becomes less important than sturdy interest rates.
The contrast is revealing: unemployed workers’ output is lost forever whereas higher interest rates change only financial arrangements. Yet that is where sentiment wants to go.
Be prepared, then, for the automatic repercussion on financial values: higher interest rates translate into lower capital values . . . and of course this includes pressure on stock prices.
So far, the value of the 10 year Treasury fell 7.6 percent since the beginning of June while the S&P500 fared better, losing .7 percent.
DJIA -1.35 percent
NASDAQ -1.12 percent
S&P500 -1.39 percent
