Financial crisis early warning expert Whitney expects the Fed to remain on hold as the U.S. economy faces a test in the fourth quarter
Meredith Whitney, a former bank analyst who gained fame as one of the first to sound the warning on the eve of the global financial crisis in 2007, said the U.S. economy will usher in a "moment of reckoning" in the fourth quarter as the one-time economic boost from the World Cup and the lingering effects of fiscal spending fade. Whitney said in an interview with the media on Tuesday that weekly credit card balances, a real-time indicator that reflects consumer spending rather than circulating debt, are currently growing at a slower pace than in May. At the same time, U.S. consumers are also digesting the pressure caused by rising gasoline prices. Whitney, founder and CEO of Meredith Whitney Advisory Group, said the above factors will provide reasons for the Federal Reserve to keep interest rates unchanged on Wednesday. She dismissed the argument put forward by Citadel Securities and others that an unexpected rate hike would help boost Fed Chairman Kevin Warsh's credibility. Whitney believes that Warsh's approach of setting up five policy working groups actually bought him a few months without the need to rush to make policy transition decisions. "I think they will keep rates on hold while continuing to use hawkish, hawkish rhetoric to leave room for maneuver for future actions," she said. "His tendency is to wait and make sure he really makes the right call," Whitney said of Wash. Regarding U.S. Treasury yields and the housing market, Whitney bluntly stated that she believed that monetary policy had a limited role. "I'm not sure they can get long-term rates down," she said. She said high long-term yields are essentially a "fiscal problem" stemming from Washington's reluctance to rein in debt. She believes this factor is likely to keep interest rates higher in the long term, regardless of the policy stance the Fed takes.