Inflation and Rising Interest Rates: America’s Newest Imports

Recent developments are placing tremendous pressure on European countries to raise interest rates. The spillover will result in higher rates here. Here’s what my readers should know:



Unemployment in Germany fell to an 18-year low in January, as boom times are back at the world’s second largest exporting country. This smells of rising interest rates.



Inflation in the 17 countries that use the euro (known as the Euro Zone countries) rose at an annual rate of 2.4% in January. European Central Bank (ECB) president Jean-Claude Trichet has publicly stated that inflation must be kept in check in Europe (ECB’s target inflation rate is two percent). Higher interest rates in the air here, too.



London-based National Institute of Economic and Social Research said on Tuesday that the Bank of England will likely raise interest rates three times in 2011 to fight inflation.



Sure, there are those who say that European countries need to raise interest rates to support the fragile euro, but I don’t see this as a conspiracy to support the euro. The United Kingdom never adopted the euro, interest rates pressures are also mounting in China and Japan, and world food prices are rising rapidly (with sugar prices at a new 30-year high this morning).



While it may be in the best interest of the United States to keep interest rates low compared to the rest of the world in an "off the books" greenback devaluation play, my readers need to keep know about these two important facts:



In a letter to the Financial Crisis Inquiry Commission from Fed Chairman Ben Bernanke dated December 21, 2010, Bernanke says that the Fed failed in 2005 to see the risks in the housing market. Do you think the Fed will hesitate to raise interest rates if the Dow Jones Industrials hit 13,000 or 14,000 in an effort to fend off another stock market bubble? I think it will.



Finally, the chart of the bellwether 10-year U.S. Treasury shows that a base has been forming at the 3.4% level since mid-December to today. I believe that base will act as the foundation for a move by the 10-year Treasury to its next stop of four percent. The yield of the 10-year Treasury is up 41% since October 2010 and keeps pushing higher.



Welcome to America’s latest imports, inflation and higher interest rates.



Michael’s Personal Notes:



Optimism on the U.S. economy is getting a little ahead of itself and this is reason for concern for me.



According to the National Association for Business Economics in Washington, U.S. companies’ employment outlook is at a new 12-year high. American businesses are planning to aggressively increase their payrolls over the next six…