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.

The stock market is rallying on the heels of falling oil prices, which are at their lowest levels since the beginning of May.  Despite the conflict that erupted between Russia and Georgia that threatens oil pipelines, oil continues it’s free fall, retreating nearly $35 from it’s July high.

“It’s become clear that demand is cratering, which is making it hard to rally,” said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “It’s hard to imagine that the market will shrug off the potential loss of 1 million barrels a day of pretty good quality crude but that appears to be the case.”

Oil producers have long stated that the natural price of oil should be around the $80 a barrel mark.  Heavy speculation and a falling dollar pushed oil above $100 at the start of the year and close to $150 by mid July.

Demand is falling across the globe so unless there are significant disruptions to supply, the price of oil could continue to fall.  There is no question that oil is the leader of the commodities market and it’s slide is having a spillover effect on the rest of the market.

Traders are leaving the commodities market in droves and pumping some of that money back into the stock market, fueling a rally that some experts feel could last a few weeks.  The bubble is bursting for commodities in general and it looks like the Fed was correct when it predicted that inflation pressures would ease as global demand cooled.

The stock market is taking advantage with it’s largest weekly gain since April.  So far, shipping and transportation companies are benefiting the most from falling fuel prices.