Despite indications from the Fed that it will carefully and slowly raise interest rates to avoid the dangerous rate surge that occurred in 1994, WesCorp is predicting an interest rate spike in the next three to six months.
Even as Federal Reserve Chairman Alan Greenspan has promised there will be no repeat of 1994-when rates turned sharply upward and sent the bond market crumbling-WesCorp VP-Economic & Market Research Dwight Johnston said otherwise in remarks before the Financial Solutions Symposium co-hosted by WesCorp and Callahan Associates.
"We think a spike is coming in the next three to six months, and the economy may not be strong enough to withstand that rate shock," he suggested. "The economy is still in recovery mode, but it's an aging recovery, and it's an economy that is based so much on debt."
Bob Burell, EVP of WesCorp agreed. "We expect long-term rates to spike up, and we expect the Fed to tighten at every meeting," he said. "There's been some complacency about there not being a lot of pressure on long-term rates, but we believe it's going to happen, and it's going to happen because of a change in psychology. One day we'll wake up and realize interest rates are too low. The spike will be moved by the psychology of the market place, not by the Fed."
Greenspan has likened the way long-term interest rates have moved to a "conundrum," but Johnston suggested Greenspan knows exactly why rates have done what they've been doing: "What it really comes down to is liquidity and greed," Johnston said, with some complacency thrown in for good measure. "Why does Alan say things like this? I guess he just doesn't want to alarm people."
A number of economic experts agree with Greenspan's prediction of continued steady growth, as evidenced by Bloomberg's recent poll of 65 experts, Johnston noted. But he did point out some concerns on the horizon:
* Oil prices. "It's not that there are any supply problems like we had in the 70s, it's just that demand has kept up," Johnston noted. "This is a trend that mostly impacts the low-income sector of our economy. You know, the rest of us don't like the rising gas prices, and so we might buy a more efficient SUV."
* The debt burden of American consumers and the federal government continues to grow, "while the rest of the world have become savers."
* Job growth could be a problem if it should falter for any reason. But a number of surveys suggest businesses are planning to hire and are flush with cash. Even so, the advent of "just-in-time employment" is wreaking havoc with monitoring the true level of unemployment.
* The so-called housing bubble will burst-at least in some parts of the country. This could cause credit unions and other financial institutions to see some of their real estate loans suddenly under-collateralized.
