Tags: Pretti | Fed | rate | economy

ContraryInvestor.com's Pretti: Fed Stuck Between a Rock and Hard Place on Rates

By    |   Wednesday, 22 April 2015 06:20 AM

The Federal Reserve faces a major dilemma: it must raise rates soon so that it can cut them again the next time we face a recession, but the economy isn't strong enough to justify a quick rate hike.

"There is one very important consideration that must be entering their [the Fed's] interest rate policy decision making at this point in the economic cycle — a consideration they will never speak of publicly," Brian Pretti, managing editor of ContraryInvestor.com, writes on Peak Prosperity.

"At some point, maybe sooner than later, the US economy will re-enter recession. Historically, that's the time when the Fed would lower interest rates in attempt to spur economic growth. But today, interest rates are already at zero."

The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008.

"This is clearly a situation the Fed wants to avoid, so raising rates soon is an urgent priority," Pretti explains. "But can the Fed (and other central banks) really raise rates now without killing the already-moribund global economy?"

U.S. GDP grew only 2.2 percent in the fourth quarter, and the Atlanta Fed's forecasting model predicts just 0.1 percent growth for the first quarter.

Meanwhile, Laurence Fink, CEO of Blackrock, says the low interest rates that central banks have fostered around the world are hurting many investors. "Global interest rates are creating huge pain," he tells CNBC.

"This is something that's misunderstood and not talked about enough. Everyone appreciates how low rates accelerate the equity markets, but it's certainly creating quite a bit of havoc with a lot of our clients," Fink notes.

"I don’t believe central banks appreciate what low interest rates do to the long-term interests of insurance companies, pension funds, retirement plans," he explains.

And what is the ramification for investors?

"If you think rates are going to stay that low longer, you're going to see more and more people moving into equities, into more alternatives," he states. "We're seeing that conversation now. We have one of the top-ranked European equity funds in the world, and we're seeing huge inflows into our European equities."

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The Federal Reserve faces a major dilemma: it must raise rates soon so that it can cut them again the next time we face a recession, but the economy isn't strong enough to justify a quick rate hike.
Pretti, Fed, rate, economy
358
2015-20-22
Wednesday, 22 April 2015 06:20 AM
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