Fed funds rate going to at least 6%

trickynick said: "That's my prediction. In 45 years there has not been a recession that began when the [i]nominal[/i] GDP growth rate exceeded the fed funds target rate. Right now nominal GDP is growing at an annualized 6.9% and fed funds is at 5%. There is plenty of room for the economy to slow down and rates to increase and as long as inflationary pressures persist there is no reason for the Fed to stop the rate hikes. It [i]may[/i] go higher but I believe it is going to at least 6%."

Darren said: "Look for a bumpy road in the economy with ever raising interest rates. If the consumers can't keep on borrowing, the wheels come of the wagon, IMHO."

trickynick said: "Oh, rising interest rate environment, how doest thou affect the markets? Let me count the ways... [b]Reduced consumer spending[/b] As Darren already pointed out, many consumers find themselves unable to finance consumption due to the increased cost of borrowing. This affects the big-ticket durable consumer goods (autos, appliances) and travel/tourism markets most notably, but it does affect everything else also. In addition to that, the option of refinancing homes in order to reduce mortgage payments and add more decretionary funds to their budget is not available the way it would be in a environment of falling rates. [b]Reduced investment due to increased cost of capital[/b] By investment in this case I don't mean stocks and bonds (more on that later) but rather spending by business on business assets (the "means of production"). Basically, the more you can earn "risk free" (which treasury securities and other high quality debt issues really are) the less incentive you have to invest in business activities be they your own (entrepenuership) or other people's (stock investment). Even if you expect a company's earnings to be unaffected by the rising interest rates, those same earnings you expect are are worth less now because of the time value of money principle. The higher the interest rates, the less a future sum of money to be recieved (i.e.: a company's earnings in a distant year) is worth. Because future earnings are worth less, stocks end up being worth less. This reduced investment also tends to put downward pressure on employment, which also finds its way into the mix with the rest of these issues. [b]Reduced leverage in securities markets[/b] Investors who buy stocks on margin pay interest on what they borrow in order to do this and many margin rates are tied to the prime rate which goes up with the Fed funds target. Part of the reason so many shares are traded every day causing lots of price volitility is that the biggest positions out there are held in "weak hands", institutional traders and hedge funds who are highly leveraged in their positions and quick to get out of Dodge if their positions are moving against them. The higher rates go the more scrutiny these positions come under regarding their potential profitability. It often turns out that positions worth the risk at lower rates have to be reduced or eliminated in the higher rate environment. As a sidenote, this is also why growth is viewed as a more attractive strategy than value towards the end of an economic expansion cycle. When things may be winding down and companies that still have strong growth prospects nonetheless are increasingly scarce. If anyone else can think of any more interest rate angles, feel free to add them."

lil dickie said: "Good points TN. I agree that it is very tough for people to buy right now on credit. If you refi-ed in the last few years with a variable rate you are in big trouble."