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Meredith Whitney warned that the US economy could face a reckoning in the fourth quarter as temporary support from the World Cup and remaining government spending begins to fade.
Whitney, founder and chief executive of Meredith Whitney Advisory Group, said weekly credit card balances are growing more slowly than they were in May, suggesting consumer spending is losing momentum.
Households are also absorbing higher gasoline prices, placing additional pressure on disposable income, particularly among lower income consumers.
Whitney described the current environment as a tale of two economies. Semiconductor companies and wealthier households continue to perform strongly, while consumers with lower incomes are beginning to reduce spending.
She said those conditions give the Federal Reserve room to leave interest rates unchanged at the conclusion of its meeting on Wednesday.
“I think they will stay on hold, and they’ll probably still have this tough guy language with this hawkish language that gives them wiggle room,” Whitney said during a Bloomberg Television interview. Bloomberg Television said Whitney expects the Fed to remain on hold amid the divided economic backdrop.
Markets were pricing roughly a one in three chance of an interest rate increase ahead of the decision, although economists generally viewed the threshold for a move as high.
Whitney rejected arguments that a surprise increase would strengthen Fed Chair Kevin Warsh’s inflation fighting credibility.
She said Warsh’s decision to establish five policy task forces gives him several months to assess the economy before committing to a change in monetary policy. Warsh has so far avoided providing markets with clear guidance on his preferred rate path.
Whitney also argued that the Fed has limited power to bring down long term Treasury yields and mortgage rates.
She attributed elevated borrowing costs primarily to federal debt and fiscal policy, saying rates could remain persistently high regardless of the central bank’s actions.
Whitney dismissed concerns that bond issuance from major technology companies is crowding out demand for US government debt, describing the amounts as small compared with the size of the Treasury market.
She also said the recent increase in initial public offerings does not necessarily indicate that equity markets are approaching a peak. Strong liquidity allows investors to rotate capital from existing holdings into newly listed companies without withdrawing money from the market, she said.
In the banking sector, Whitney expects the current focus on share repurchases to eventually give way to major acquisitions.
She identified JPMorgan as the most likely large US bank to initiate a transformational transaction, potentially restarting the type of consolidation that reshaped the financial sector during the 1990s and early 2000s.
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