The U.S. Federal Reserve finds itself in a predicament, it needs to keep interest rates low so that the U.S. economy can continue to grow post pandemic, and it needs to contain over exuberant equity markets plus runaway house prices. The question is which is the least painful in terms of control?
Globally, economies are growing, and the U.S. is no different, the Federal Reserve wants the country to come back to full employment and keeping interest rates low will help it reach its goals. States are starting to allow more access to various services such as going to restaurants, movies, in some states theme parks, and airlines are now recalling flight staff as the number of flights increase. Offsetting this, is the fact that equity markets are up significantly against the prepandemic closes, the Dow is up 12%, NASDAQ is up 37%, S&P 500 is up 18%, these are approximate, give or take 1%. However, bitcoin is up 600%, so is Ethereum, other crypto currencies have rallied significantly as well. These especially have been worrisome for the Federal reserve as the rapid in prices has created massive wealth with no real asset base. Today Morgan Stanley announced that it will offer bitcoin funds to its wealthy clients, adding more credence to bitcoin’s reputation. The work at home edict has now proven to be so successful that a lot of companies are making working at home permanent or using some sort of hybrid of and home. This has resulted in huge demand for single family homes as people want to have an office of their own or simply space in another room to do their work. House prices have jumped significantly, and people have taken on extra debt in order to buy bigger premises. The current low rate agenda has helped in qualifying for mortgages, but it would be unwise to get floating rate if it seems that central banks are poised to hike rates at a moment’s notice.
The outcome for today will likely be no rate hike, but expect that the next rate movement will be higher and sooner than expected.