From the January 01, 2010 issue of Futures Magazine • Subscribe!

Interest rate policy: Under Pressure

Garner doesn’t see rates going up until 2011. “They might adjust rates at the discount window before they touch the Fed funds. Throughout 2009 we’ve seen record-breaking auctions. Simply slowing down the issuance of Treasuries and pulling some of the cash out of the market, stop buying GSEs and long-term Treasuries, will be their first step towards getting rates to a more realistic level,” she says.

“It really depends on how retail sales go into December and January,” Regan says. “[As soon as] the Fed gets an opportunity, they’re going to raise rates, but they can’t do it if retail sales and unemployment still look bad.”

Although other central banks, such as Australia, have begun to raise interest rates, this doesn’t seem to be putting pressure on the United States to follow suit. The one central bank with the most influence over U.S. interest rate policy is the European Central Bank (ECB). Most analysts expect the ECB to raise interest rates before the United States does. “In the U.S., there’s much more political pressure on the Federal Reserve. The policy actions from the Great Depression were abrupt and what the current Administration wants to do is go the other way, which is least abrupt,” Kimbarovsky says. Meanwhile, he expects the UK to delay rate hikes and test the waters by reducing
credit facilities.

“More of the ECB is talking about exit strategies than the Fed is right now,” Rupert says.

Garner expects the Fed to coordinate their rate hikes with the central banks of Europe. “If the U.S. makes a step before the European Union, the currency markets are going to go wild and that’s going to throw a wrench in the recovery,” she says.

Regan agrees. “The U.S. should be more concerned about raising rates at the same time as the ECB rather than Australia. I would like to see Europe and the U.S. raise rates at the same time, which would help the dollar,” he says.

Rupert expects Japan to raise rates in late 2010. “The political winds have changed in Japan where the new government is looking to introduce a number of stimulus programs and it’s not obvious that those are going to take hold fully. It’s going to hurt the debt outlook for Japan and that might start to increase interest rates in Japan, which would be a further restraint on growth,” she says.

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