Federal Reserve & Interest Rates

Calls for an end to the recession are gaining steam once again and the Federal Reserve should be watching carefully how investors react.  The huge increase in government debt has had little impact on interest rates so far, since many investors are still using Treasuries as a safe haven until they think the markets are starting to turn around.

Many investors are champing at the bit, hoping better yields are around the corner and the big question is where will they turn to, stocks or commodities.  If we start seeing a big push in commodities once again, the Fed will have to rethink it plans to keep interest rates at 0% for an extended period of time.

A lot will depend on the next earnings reporting period, if those numbers remain sluggish, investors may view commodities as the better option.  Keep in mind that the government’s debt is one big noose hanging around our economy and while inflation concerns are muted for the time being, eventually it’s going to rear it’s ugly head.

As investors start turning away from Treasury securities those inflation concerns will start growing.  If the Fed has to raise rates before they want to, it could have a serious impact on recovery efforts.

Demand isn’t going to remain down forever but it’s not going to return to it’s former level overnight, not with the current unemployment situation the way it is.  That being said, the Fed is going to have some difficult choices ahead of it pretty soon.

Many experts believe that this recession is going to leave a deep and lasting impression on the economy through the next decade.  Economic growth will likely remain sluggish for years to come and the availability of credit will also remain scarce for some time as the banking system tries regain it’s footing.

A lot of experts have been claiming that the recession is about to end, maybe it is and maybe it isn’t.  We’ve seen both the stock and commodities markets both stage mini-rallies only to come quickly back down to earth.

Investor have been trying to figure out what these little glimmers of positive data really mean but so far it hasn’t meant much.   The banking system is still in a precarious position and credit remains scarce.

Consumer demand has remained depressed and the slight boost it received from stimulus payments will soon end.  Coupled with rising unemployment that is expected to climb until at least the end of the year, we can see why any outcries of a recovery are meaningless at this point.

Some companies have reported some surprising earning which helped buoy the stock market for a little while but that too should be taken as a grain of salt.  Much of the climb in net income for many companies had to do with revaluing assets that were at depressed prices.

Even if we do hit the bottom fairly soon, the road to recovery appears to be long and arduous.  The housing market remains in shambles and eventually the debt the government added to save the banking system will have a negative impact on economic growth.

The government’s fiscal and monetary policy actions likely averted another Great Depression but it also served to extend the timeframe of the decline, albeit at a much slower pace.  Until the financial system is on much firmer ground, the credit just won’t be available to fuel a recovery.

A month long rally in the commodities market started to fade last week and that downward momentum has continued to start off the new week.  Commodity investors appeared to be overly optimistic over a few signs that the economy may have started to turn around.

Lead by the rise in the price of oil which started to rally in preparation for the summer driving season, however reports have shown that demand is down from a year ago and gasoline stocks have continued to build.  The oil market has been highly volatile over the two years and has seen large movements in both directions.

Some analysts have commented that investors have been overreacting to partial economic data and have remarked that we may be seeing the start of another overreaction in the downward direction in response to the blunted rally.  There are no real signs that fuel demand will recover anytime soon so any sharp rise would likely be blamed on speculation.

The government is also seeking to find ways to restrict speculation in the commodities market by possible requiring larger margins for the placement of orders.  Despite opposition from many traders most people would like to avoid a repeat when oil rose to the ridiculous price of $145 a barrel.

Granted the price fell all the way back down to around $35 at one point, which had oil producers threatening to cut supply drastically but they would also prefer a more stable price.  Most producers agree that a fair price is around the $55-$60 range and that appears to be where it’s heading for the time being.