AAA-ratings fear for US to trigger 0.25% interest rate hike?
Posted on 15 March 2010 with no comments from readers
Warnings from credit rating agencies like Moody’s that the US and UK are in danger of losing their AAA ratings could be the final straw that persuades central bankers to jack up interest rates by a marginal amount this week.
An article on the financial website arabianmoney.net last week that cited senior banking sources as predicting a 0.25% rise in the Fed funds target overnight rate on Tuesday, has set pulses racing (click here).
Fed cred
But few commentators give this source much credence and the tendency is to believe the Fed and its promises of an extended period of low interest rates.
Words can always be twisted, of course. The Fed could jack up rates 0.25 per cent and still claim that it is sticking true to its word, with rates still low and expected to stay low for the foreseeable future.
The impact on financial markets would be instant. The AAA-rating would be assured and bond prices surge. Stock markets would come off their recent highs and this might be greeted as a healthy correction from overvalued levels.
Dangerous complacency
Markets dislike the unexpected but they may have become unduly complacent recently believing that emergency low interest rates are an indefinite phenomenon.
All history says otherwise if only because artificially suppressing the cost of money is inflationary and unfair to those paid low interest rates. It is also bad for government debt ratings and the government has a lot of debt to raise this year.
Standby for a shock announcement from Fed chairman Ben Bernanke tomorrow night. The fear in the market today is that China is tightening but the real gorilla in the front room might be much closer to home.
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The irony is Yellen was just picked to replace Kohn as second-in-command at the Fed. Yellen recently stated she would vote for negative interest rates if that were possible.
Did you ask your banker source if he is short front month Fed Funds futures? Somehow I doubt it.
If they raise rates, the floor of the New York Stock Exchange will look like central London in the excellent movie ‘Lifeforce’ (1985) when the zombies were running amok. Take the advise of the SAS officers, “Don’t go in there, sir.” (That didn’t apply to the filming of the Mathilda May scene.)
Well Peter, No rate hike so that person was wrong. Rally from Hong-Kong, Taiwan and European markets finishing all in the green pretty much told everything.
Now we have a green light to 12000 on the DOW. Pathetic but most likely the case. No more bad news left to come out.
Ed Note: or good news perhaps? Could still be the market top – it certainly looks like one on the charts.