AAA-Ratings Fears May Trigger Interest Rate Rises

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by: Peter Cooper

Warnings from credit rating agencies like Moody's that the US and UK are in danger of losing their AAA ratings could be the final straw that persuades central bankers to jack up interest rates by a marginal amount this week.

Our article last week citing senior banking sources as predicting a 0.25% rise in the Fed funds target overnight rate on Tuesday has set pulses racing.

But few commentators give this source much credence and the tendency is to believe the Fed and its promises of an extended period of low interest rates.

Words can always be twisted, of course. The Fed could jack up rates 0.25 per cent and still claim that it is sticking true to its word, with rates still low and expected to stay low for the foreseeable future.

The impact on financial markets would be instant. The AAA-rating would be assured and bond prices surge. Stock markets would come off their recent highs and this might be greeted as a healthy correction from overvalued levels.

Markets dislike the unexpected but they may have become unduly complacent recently believing that emergency low interest rates are an indefinite phenomenon.

All history says otherwise if only because artificially suppressing the cost of money is inflationary and unfair to those on paid low interest rates. It is also bad for government debt ratings and the government has a lot of debt to raise this year.

Disclosure: Author holds a long position in the US dollar