Interest Rate Hike Could Change Everything

By 19th May 2017 Industry News No Comments

U.S. Federal Reserve officials are pressing interest rates upward. We have seen historically low rates for a longer than expected time period. The catalyst was of course the financial crisis of the 2000’s (i.e. – the housing bubble). The days of cheap money are coming to an end unless Neel Kashari gets his way.

Neel Kashari is President of the Minneapolis Fed and he argued this week for restraint in regards to raising rates.

Far Right: Neel Karshari

Neel points out that government officials cannot predict nor stop bubbles from occurring. In Neel’s op-ed, he states that “debt seems to be the key risk in bubbles.” Many Oilpros agree that debt is the single biggest risk to the current unconventionals boom and its long-term sustainability.

The Fed appears to be motivated by two factors not traditionally considered at FOMC meetings which is the stock market’s record rise and cheap money. Neel’s view is the Fed should not step into protect investors. Investors must decide their own appetite for risk and receive the rewards or consequences of their decisions. The Fed should not be expanding their long-term mandate to include stock-market-cooling. The bottom line is that wage growth is stagnant and employment is not nearly as good as some politicians and statisticians tout. Those of us in the oilfield are the best witnesses to this economic reality.

Neel argues against more forthcoming rate hikes in his addendum:

The cost of keeping rates high to reduce the chances for future bubbles would be higher unemployment and a risk of unanchoring inflation expectations to the downside. Those are large economic costs.

Sometimes the best answer is to do nothing, sometimes it is not. Unfortunately we don’t tend to get our answers until it is too late to go back down the other road.

There is no doubt the oilfield will take a hit when rates go up. Shale operators will pay more for their credit. Also, which direction do oil prices go when rates go up? Down.

Beware of the Almighty Fed.