In a blog for the Institutional Risk Analyst, Christopher Whalen wrote that with the economy slowing and credit losses rising, the Fed will have to stop its rate hikes and prepare for deflation.
“Wall Street desperately wants to believe that interest rates are headed higher, part of a larger need to confirm that the current market and economic situation is returning to normal,” Whalen wrote. “Yet fact is, after eight years of monetary experimentation by (former Fed chair Ben) Bernanke, (current chair Janet) Yellen & Co, interest rates are falling, debt markets are at record levels of issuance and the new-issue equity markets are largely barren of value.”
Whalen wrote that the economy was in a “credit bubble” – and even intimated that the Fed might have to start lowering rates again.
“Not only has US public debt almost doubled since 2008, but private debt has likewise risen by double-digit rates,” he wrote. “The slowly rising cost of credit visible in banks and the bond market may herald the start of a new type of debt deflation cycle.”
According to Whalen, that means the June rate hike will be the last one for the year – and maybe longer.
“Thus we expect June to be the last rate hike by the Fed in 2017 and perhaps for years to come,” he wrote.
While most observers agree that the Fed will hike rates at its meeting Wednesday, one analyst says that hike might be the last one we see for years.