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Bill Gross: Expect Rate Hike—Painful Cure to Longstanding Problems
Aspire, Thought Leaders | 21 August 2015
By: Vance Wong
Articles (74) Profile

Photo: REUTERS/JIM YOUNG

A few weeks ago, Bill Gross released an August issue of his investment outlook for the remaining part of this year. The legendary bond guru talked about a very probable September interest rates hike and mentioned how important it is to the US economy, and essentially the world.

In a recent tweet, Gross reiterates his call about a September hike, and said that the US Federal Reserve is raising rates despite the data advising otherwise, because financial conditions are the priority. Other economists think that a September hike is unlikely, though.

Jim Cramer: Housing and Labour Checked, Then What?

Cramer told CNBC earlier on 20 August that while he wants the Fed to “get it done and over with”, he doubts the ability of the economy to withstand that now. He points out that the housing and labour market is indeed improving, but everything else is not.

The housing and labour market only makes up ten percent of the US economy, maybe more, now that it has improved. However, the remaining 80-odd percent is “not so hot”. Hiking rates would strengthen the US Dollar significantly, which would reduce exports substantially.

The result will be stronger consumer spending, but that alone would not be sufficient for a recovery. Nevertheless, this would put some worries to an end.

Larry Lindsey: Feds Will Pass Hike, Again

Former Fed governor Larry Lindsey stated that growth has been underperforming forecasts since December 2014 when the Fed projected a 2.8 percent growth for 2015. Ever since then, the Fed had been reducing its forecasts of growth.

Lindsey thinks that if the Gross Domestic Product (GDP) growth is not improving, the decision for hiking rates would be hard to make. The Fed would not want to raise rates and be smacked with a slowdown following that decision.

Revisiting Gross’s Thoughts

Gross acknowledges that the US economy is not doing well and hiking rates might go wrong in many ways that we could not imagine. The first step is always the most difficult, considering that the US economy has been running on ‘cheap’ money.

The Fed has to raise rates, minute but enough to move the economy in the right and hard way. The whole process would definitely prove to be painful, especially considering all the debt that have ballooned over the years.

Hiking rates would somehow wake the stronger corporations up—it would deter them from borrowing ‘cheap’ money for more stock buybacks, a problem that Gross mentioned alongside a street full of ‘zombie’ companies. All of which would prove harder to solve in the future if ultra-low interest rates were to persist.

With a Communications background, Vance has the passion to write with a purpose - to provide content supported with substantial evidence to vested readers.

Please click here for more information about this author.


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