Irwin's on the ball

Irwin Kellner is the chief economist over at marketwatch.com. Unlike just about every other economist in the US market Kellner has been arguing for sometime that the next move on interest rates by the Fed will be up. It took a while but the bond market is now siding with Kellner and over the last week other economists have also jumped into his camp.

Kellner's article is reproduced below. Click here if you would like to hear Kellner speak on the same topic.

The impossible dream
Commentary: Why the Fed could raise rates as early as this month By Dr. Irwin Kellner, MarketWatch
Last Update: 11:46 AM ET Jun 12, 2007

HEMPSTEAD, N.Y. (MarketWatch) -- Let me see if I have this right: Investors want the economy to be strong enough to generate decent profits growth, yet weak enough to give the Federal Reserve a reason to reduce interest rates. Talk about dreaming the impossible dream!

When the economy nearly ground to halt in the first three months of this year, investors didn't know whether to laugh or to cry. They were happy in one sense because they figured for sure that this weakness would lead to an early cut in interest rates by the Fed. On the other hand, they also were concerned about what this lack of growth would do to corporate profits.
As a result the stock market meandered on some days, while jumping up and falling down on others. It may have been a trader's delight, but it sure gave the average investor a case of the nerves.

Now, with the second quarter all but done and another Fed meeting looming, investors are once more biting their nails. Most of the data available for the quarter to date suggest that the economy is growing faster now than it did in the first quarter. The rate of inflation has picked up as well. This should assuage those whose primary focus is profits and dividends. Faster growth combined with higher prices generally boosts revenues and thus leads to better earnings.

At the same time, however, it has put the kibosh on the notion that an interest rate reduction is just around the corner. Indeed, there is every reason to think that the opposite is in store.
For one thing, the bond markets have finally awakened from their long slumber and begun to sniff inflation. They have boosted long-term rates by more than half a percentage point in the past couple of months alone. This has produced a positive yield curve for the first time in nearly a year.

Indeed, as yields inch their way higher, the curve is getting steeper day by day.
For another, the bond crowd (and others) has finally begun paying attention to what Fed officials from Chairman Bernanke on down have been saying for months: lack of growth is not the economy's problem -- inflation is.

I certainly have been listening to the Fed. Those of you who check our economic forecast and calendar pages regularly know that I have been calling for a rate hike for quite some time.
Some weeks it was pretty lonely out on this limb. Not any more. With just about everyone throwing in the towel on the chances for a rate cut, the rate hike limb is starting to fill up.

Indeed, just this week a major business magazine did a 180 and has now begun to warn its readers that higher rates are nigh. Judging by the number of signals that central bankers have sent in recent weeks, the Fed could very well decide to raise rates as early as this month. If they don't move in June, then they'll probably pull the trigger in August. After all, there's a limit as to how much more inflation the Fed can afford to tolerate before the markets begin to question its credibility. End of Story

Dr. Irwin Kellner is chief economist for MarketWatch. He also is the Weller professor of economics at Hofstra University and chief economist for North Fork Bank.

It's looking like a very interesting and potentially volatile 3 days ahead with key data due out on producer prices (Thursday) and consumer prices (Friday). This data and to lesser extent the beige book and retail figures due out today will be crucial in in forming the Fed's decison on the direction of rates in the near term.