How Will 2017 Rates Affect the Markets?

January 3, 2017 3:48AM CST

Ricardian Equivalence is the hypothesis based on government spending models which shows a divergence between demand and stimulus. Over a long period of stimulus, we find lessening demand which equates to deflation. This means, and what we may be seeing today, is a paradigm shift in inflation. The exact opposite of the prolonged stimulus/demand ratio. As stimulus dies down and rates begin to rise, demand may begin to rise at a faster pace than what is forecast today. As demand rises, so should inflation. If the Fed is versed in hindsight policy maneuvering, which has been the case since I have been in the business, I can imagine a real US interest rate much higher than the Fed set Fed Funds rate. This may create a landscape with much higher commodity prices over the next several years as rates continue to rise. In this scenario, the Fed would be on the defense as in past instances. Raising rates combat rising inflation, thus pushing further into the Ricardian Equivalence. If the last lowering cycle of rates lasted thirty plus years and this is the beginning of a long term up cycle in rates, we may be in for quite a long ride.

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