Rosenberg: Fed Can't Raise Rates Until 2011
A: This may be true unless one area of the tradable markets force the fed's hands to raise rates earlier. Imagine a world with surging equities and oil/commodity prices on a souped up reflation trade - can $100 oil, $1,200 gold, and surging commodity prices impact the fed's thinking? How will that help anyone; especially the latter right as unemployment climbs to its ultimate peak for this cycle? As I mentioned before, in my opinion inflation will first come in the form of higher food, higher energy, higher metals, higher commodities across the board, higher taxes, higher rates, higher health care costs, etc..all the stuff that pinches corporate profit margins and squeezes consumers wallets. I don't see wage inflation being a problem for many years.
From David Rosenberg's Toast With Dave:
FED CAN'T RAISE RATES UNTIL AFTER 2011So, the main point is that the fed must continue to engineer a bank recapitalization environment for another 14+ months as commercial debt matures and future loan losses continue to be absorbed. This was part of my Wave 2 concerns that I put off until later 2010 and into 2011.The reason — there is a wave of mortgage refinancings coming in the housing market for one, and not only that, but in the commercial space, there are 2.7 trillion of debt coming due through 2011 and another 1.5 trillion of leveraged loans (see page 24 of Thursday’s FT). In other words, the default rate is going to rise even further and the Fed tightening policy would only aggravate that situation. In other words, the Fed is simply immobile for at least the next two years.
I am of the camp that the fed won't raise rates until unemployment is shown to be stabilizing or at the very least, recovering. That may be a ways off but I wasn't thinking 14 months off. Maybe mid 2010 we see the first fed move. Since monetary policy works at a lag and we are coming from a ZIRP, is a 0.5% or 0.75% fed funds rate really considered a tight policy? If it is, then man, what a world we transformed into when only 3 years ago the FFR stood over 5%. In the meantime, I wonder if the markets will force the fed's hand early into raising rates before they really want to.
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Comments (4)
Noah,
Translation: Dollar carry trade for another (insert x months) here.
Dave believes dollar carry trade for 14+ months.
And you believe it will last through June 2010.
The first speed bump will occur towards the beginning of March 2010 when MBS quantitative easing is set to end.
The second speed bump is end of TALF in June 2010.
Who wants to bet that Bernanke will back off and extend it? It's not like he has any more credibility left.
Posted by In Debt We Trust | November 13, 2009 4:31 PM
Don't discount the importance of the rest of the world. Maybe the Fed stays on course for 2 more years. But what if Japan blows up (due to excessive debt) in the meantime? That could wreck the carry trade, too!
Posted by Thisson | November 13, 2009 5:09 PM
thats a scary thought IDWT! Ill take the EXTEND side of the bet!
Posted by Noah | November 13, 2009 5:30 PM
Thisson,
Speaking of Japan,did you notice the move up in JGB yields this week?
On the other hand, the sanguine Japanese government can also move to buy up its own debt. That would depress the value of the yen and provide much needed relief to its export sector - something I am sure Sony, Mitsubishi, etc. have been begging for all year long.
However, that is only a shorter term solution to a longer dated problem.
Doubt was cast on Japan's finances earlier this week by David Einhorn, macro hedge fund chief of Greenlight, who famously predicted the insolvency of Lehman Brothers.
Although Einhorn obviously was talking his book (he is shorting JGBs), his concerns echo the voice of other (mostly foreign) critics. Fundamental factors are the reason behind Japan's indebtedness. Hostile attitudes towards foreign immigration (even among other Asian countries), declining birth rates, the rise of China as a competing export center, and persistent unemployment are all factors edging into the equation.
Posted by In Debt We Trust | November 14, 2009 7:14 PM