A bold prediction

From the Daily Reckoning: “Investors are convinced that the recent spate of good economic news will cause the Federal Reserve to raise interest rates before the end of the year. They’re dead wrong. Here’s the fact investor are missing: consumers can’t afford rising interest rates. The Fed can’t raise rates, says Denning, “until the final piece of the inflation puzzle is in place: rising consumer incomes. Until that happens, rising prices will simply make consumers cut back on spending. Throw in rising interest rates and energy prices and you have two more factors which lead to slower consumer spending and economic growth. “Bottom line: the economy can’t grow until the consumer can spend more. And the consumer can’t spend more when prices and interest rates are rising. If consumer incomes don’t inflate, inflation in producer prices or consumer prices won’t matter. Until consumer incomes rise, the Fed stands pat. “And here’s a prediction for you – the Fed will become so concerned with the market pricing in rising rates (and pushing mortgage rates up) that it will cut rates by 25 basis points at its May 4th or June 30th meeting.”

That flies in the face of what almost everyone is thinking. I have no opinion myself, but I have to admire the boldness of his call. By the way, I had a nice chat with Robert Prechter of Elliott Wave fame. I’m preparing an interview for a future column. Should be interesting for the dismal scientists.