Has The FED Got It Wrong When It Comes To Interest Rates? Here’s What a JP Morgan Chase &Co. (JPM) Analyst Has To Say
In the normal course, the Federal Reserve has all economic parameters to take a call on hiking the interest rates. The hopes of hike came before the September meeting. However, the Fed has given a pause one more time. As a result, JPMorgan Chase & Co. (NYSE:JPM) analyst, David Kelly, believes that there was lack of understanding of economics in the Fed as far as hiking the interest rates were concerned.
Fed Approached Interest Rates Wrong Way
After the financial crisis hit the country, the Central Bank preferred to keep the interest rates low to spur the economic development. However, JPMorgan Chase & Co. (NYSE:JPM) analyst thinks that the Fed was approaching interest rate hikes in the wrong way. He told the media that the Central Bank misunderstood the effect of the rate increase on the market. He found a lack of investigation on the non-linear response to interest rates.
According to Kelly, the principle of understanding among the Fed was that any hike in rates would slowdown the spending, as well as, lending. That would result in cooling an economy, which might be running hot as it was heading towards the bubbling territory. In reality, Kelly thinks that it was not all that simple to reach that stage.
Brings Business Forward
The JPMorgan Chase & Co. (NYSE:JPM) analyst believes that increasing rates would bring business forward. According to his estimation, 1% of Fed funds rate would add a potential $60 billion from interest income, which would also help the economy to grow. The prolonged lower interest rates do not allow the lenders to make money from loans. Therefore, he thinks that $60 billion from interest income would compensate any weakness in business activity.
Similarly, JPMorgan Chase & Co. (NYSE:JPM)’s Kelly said that hiking the interest rates will demonstrate the confidence in the country’s economy. That would boost investment. However, he cited that the housing market might witness a drawback due to increase in rates. It now remains to be seen whether the Fed will take the final call.
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