Fear of contagion is keeping Fed rates low

The fear of contagion spreading from Europe is likely to keep the Fed funds rate low for longer and the rhetoric used by the Fed is unlikely to change as rates are kept low for ‘an extended period'.

The low Fed funds rate and low real yields may prove to be a boon for risk assets such as equities, and could cause a liquidity driven rally similar to the one that drove the market from the March 2009 lows. The problems in Europe have caused a mass exodus into dollars and, in particular, US Treasuries. There may come a point in the future when this wall of money finds its way into the US equity markets. Although the US is undoubtedly in better shape than Europe there are issues to consider. The rapid snapback in the economy is so dramatic that we may have seen a peak in the leading e...