What happens after the rate hikes?

With the ECB on Thursday expected to raise interest rates and the minutes from the March FOMC meeting out tomorrow (following many Fed speeches recently) where maybe we’ll get some color on the exit strategy debate, the question this all brings is what will the impact be of higher interest rates on still overleveraged economies. The answer is, there is no easy way out. Deleveraging is the best, albeit painful course of action but politically unacceptable to many and inflation is the other direction, politically easier and which eases the burden of debt but with its own insidious dark side. Euro zone PPI rose 6.6% y/o/y, the fastest pace since Sept ’08. AAA said the average gallon of gasoline rose another .03 over the weekend to $3.66, up .50 since late Feb. The annualized extra cost of about $70b compares with the payroll tax benefit we all got of about $120b. A German newspaper said the IMF wants Greece to restructure its debt but it’s been denied by both.

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