E The Fed Reserve Rate Hike And Beyond

Yesterday, the thing that many feared, happened.

The Federal Reserve raised interest rates by a ¼% or 25 basis points.

Over the last couple of months, I have talked to clients, friends, colleagues and associates about this rate hike, and there were mixed reviews. Some thought they should leave the rate at 0% and others thought rates should have been raised a long time ago. We even hear that head of the International Monetary Fund (IMF), Christine LaGarde asked for the Fed to hold back any plans to raise rates because the global economy is too fragile and this could have an adverse affect on the rest of the world’s economies.

For me, it’s not a big deal. The Federal Reserve hasn’t raised rates since 2006 and has had approximately a 0% interest rate environment in the Unites States since 2008. The Federal Reserve needs to begin the process of raising interest rates to avoid any potential hiccups within the economy if (and this is a big IF) inflation gets out of control.

INFLATION

In my opinion, we have a greater chance of experiencing deflation, which is a fall in overall price levels, in the short- to mid-term time frame, then we do to experience inflation. Nobody saw oil prices falling like this over the last year. I was estimating that oil would be at $50 a barrel of oil by now. I was wrong, like so many others.

Many publicly traded companies got a little too happy with low interest rates and overextended themselves by taking on debt to fuel things like share buy backs, but their revenues have remained flat or declining. The Energy industry is a perfect example of this. Oil companies are shutting down rigs and laying people off, all while having a boatload of debt to service.

Fundamentally, it’s hard to conceive of inflation growth with corporations putting an end to their big spending and laying off their workforce. With a weakening workforce, you won’t see wage growth. Without wage growth, it’s really hard to envision a massive inflation increases.