Hugh Johnson
Hugh Johnson
Hugh Johnson OBEis a British author and expert on wine. He is considered the world's best-selling wine writer. His 1961 tasting of a bottle of 1540 Steinwein from the German vineyard Würzburger Stein is considered to potentially be one of the oldest wines to have ever been tasted...
ProfessionNon-Fiction Author
Date of Birth10 March 1939
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It was almost a sure bet that the Fed was going to raise rates in June. Now it's almost a sure bet, say 50-50 at least, that they won't move in June.
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The good news was good enough to more than offset the worries about wages and Federal Reserve policy. There is an emotional component to the market today. Some speculative spirits are starting to stir.
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It's very clear that higher energy prices are now being passed along to consumers, and it's not difficult to do that when the economy is as strong as it is. This will put additional pressure on the Federal Reserve to continue to raise short-term interest rates.
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Everybody is going to know the same, but it's going to be less. The disclosure of information becomes more carefully managed than the Federal Reserve manages the disclosure of information.
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The biggest risk in 2006 is that the Fed will be seduced by worries about inflation into raising rates too high. A lot depends on what the 10-year does and while I would hope that they would take notice that it's going down in yield, the question is whether they will take it seriously or dismiss it.
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It's a migration toward value as a reflection that investors believe the growth rates of earnings are slowing. It will continue until investors are convinced that the Fed will take its foot off the break, or reduce interest rates.
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It's a reasonably accepted conclusion that the Fed will raise rates in both June and August; that's what the market has discounted. I don't know if Friday's employment report will change that, no matter what it says.
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When it appears as though the governors of the Federal Reserve believe that the end of the rate increases is near, that's very good news for investors. A lack of ambiguity from the Federal Reserve is always a little bit of a shocker.
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This market is trying to rally. If the Fed reduces interest rates by 50 basis points, it will touch off a rally, but if we get a rally it will be guarded.
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After seeing these reports, it's likely the Fed will...raise rates at the measured pace the market is used to.
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I think what the half-point cut showed was that the Fed for the first time appears to be taking the situation very seriously. I think investors are also still mulling the move and thinking what is it the Fed knows that they don't know. Could it be worries about a double-dip and deflation? It's this uncertainty, among other factors, that's the reason why we're down today.
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If the Fed raises rates three times, they're not doing it just to have fun. Life is good.
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Long-term interest rates are low and I'd prefer to buy when rates are higher and more attractive. As a federal government issuer or taxpayer, I'd be excited but, as an investor, I just don't see the appeal.
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Clearly the Federal Reserve is getting what it wanted with six interest rate increases.