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Thursday, September 28, 2017

KGI Fraser is dead wrong about the FED staying put on the interest rate in December 2017.

I extracted this from KGI Fraser research report on 25 September 2017.

I believe KGI is wrong in its analysis and the analyst should be fired for the singularity thinking that is primarily focused on inflation.

Fed Chair Janet Yellen has indicated a very hawkish stance on future interest rate hikes in her latest speech.  I predict that the FED will hike interest rate in December and nothing will stop her from doing so unless a war breaks out.


Eric Ho said...

Don't let the inflation figure fool you!

Many economic analyses have become obsolete or irrelevant over time. Therefore, we also must change with time and adopt different economic analyses.

Just look at the Phillip curve which depicted an inverse relationship between inflation and unemployment in the 1960s. The USA is currently having low inflation and low unemployment. Therefore, is the Phillip curve relevant in the analysis of the current economic situation in the USA?

What are the causes of the change in the relationship between interest rate and inflation now?

Industrial revolutions like automation and artificial intelligence have managed to increase productivity to hold prices down in recent years. Furthermore, the low oil prices also contribute greatly to keep prices stable in recent years. Thus, the inflation rates have been kept artificially low up to now. The FED has realized that it is behind the inflation curve now even without any sign of inflation and will continue on its hiking path.

However, we would like to highlight that interest rates are not just used to manage inflation. Rather, the Interest rate is a part of monetary policies to manage the economy. Therefore, a government also will increase interest rate during a period of low inflation or cut interest rate during a period of high inflation to manage its economy. In a nutshell, the interest rate movement is not affected by the inflation per se but is based on a confluence of economic factors.

Eric Ho said...

It will be interesting to see how KGI retracts its analysis on the Fed hike.

Eric Ho said...