Magazine article American Banker

Some See Risks for Banks Even If the Fed Stands Pat

Magazine article American Banker

Some See Risks for Banks Even If the Fed Stands Pat

Article excerpt

Investing under the belief that interest rates have stabilized could backfire, some economists warn.

Stocks, particularly interest-sensitive financial stocks, have been trending higher this summer in anticipation that Federal Reserve policymakers will leave the Fed Funds rate unchanged at 6.5% at its meeting tomorrow, ending a series of rate hikes that began last summer.

Charles Blood, director of financial markets strategy at Brown Brothers Harriman, says it could be a mistake to assume the rally will continue. Such thinking ignores the softer earnings that accompany a cooler economy as well as a real possibility of further rate hikes.

"As we have noted repeatedly in recent months, the real test for the economy will be the strength in retail sales in the next three months," Mr. Blood said in a report on Friday.

If the Fed reacts to these numbers by hiking rates again in November, it could come as a bad surprise to investors who relied too much on the good news of a cool economy, he said.

James F. O'Sullivan, an economist at J.P. Morgan, said the economy is still hot. "I don't like the expression `soft landing,' " he said, "because I don't see a landing."

Core inflation is still a major concern at J.P. Morgan. The current rate of 2.4% "reflects the overly tight economy, which is unlikely to get any relief for at least a few more quarters as growth stays strong," Mr. O'Sullivan said.

A low household saving rate and rising consumer debt are also cause for concern, said Sung Won Sohn, chief economist at Wells Fargo & Co. …

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