If the Fed is strong for cutting one week and strong for raising the next week, the net is that the Fed is seen as not strong at all, but as indecisive and flip-flopping. Bernanke may want to consider not shouldering so much apparent responsibility the next time around - if he is still on the job when that time comes.
Bernanke is also not very adept politically. A more wily chairman would lay off more of the problem onto the politicians - where it rightly belongs.
Instead, by moving out front he becomes the face identified with the problem. That's not where a Fed chairman should be.
They have no input into the matter at this point. The bond market will do it for them (I'm sure some will try to spin it as Gross talking book but he would be correct). Look at what happened to the 2/10 in England......
fighting a battle against deflation that never was.
wadr to prof. duy -- this is premature. wealth destruction and credit contraction are well underway in the united states and still gaining steam.
what we're seeing is less a classic inflation, imo, than a heavily manipulated currency regime in the dollar sphere that is causing massive inflation outside the US but within the dollar pegs. some of that inflation is then feeding back to the US in the form of commodity prices.
some of that is to be expected -- after all, recessions are all about rising prices in raw materials and unfinished goods vis-a-vis finished goods and still more levered assets.
through that lens, i'd view commodity price increases as a sign of success, not failure. if commodity prices were broadly falling now, given the credit backdrop, we would all rightfully be talking about september 1931. that's really the last time the fed was faced with a currency crisis amid a credit crunch and following an intense series of "stabilizing" rate cuts. in the end, it chose to defend the dollar, raise rates and unwittingly spark the great depression.
I thought the tough talk on raising rates (which seems to have caused the markets to throw all the toys out of the pram again this morning) was to pop the inflation in commodities.
So, why is oil up again?
Just wondering why we're getting the worst of all worlds...
Duy has been wrong on rates for about 200 bps now. Lehman getting hit again today on rumors they've had to approach the Fed for funding. The Fed should have stopped around 3%, but with the financial crisis still alive and well, it's going to be very hard for them to hike rates this year.
Btw - when I said above to expect Volatility to reign today, I meant up, down, around. Don't be surprised if the Dow, etc., take back most of this morning's decline by the afternoon, only to slam it down during the last hour and a half. That's classic WWW. (Just an FYI)
they are, but it's more than that. retailers are being slammed. tech is being slammed. a lot of overtraded stocks (including financials) are being routed.
this is less fundamentals at work than systemic deleveraging, imo.
if certain high-level israeli ministers with heavy american connections would quit talking about how bombing iran is a foregone conclusion, that would probably help.
The hawkish talk is just that TALK..the classic way to "talk-up" something...in this case the dollar. Repeating what several above have stated, there is NO WAY the Fed raises rates this year...no way, no how.
And Professor Duy is wrong about the Fed having no one to blame but themselves. How about blaming this Administration's poor fiscal policy and the unproductive deficit spending that support's the Iraq war....that's what's driving up domestic inflation right now!!
Repeating what several above have stated, there is NO WAY the Fed raises rates this year...no way, no how.
i'd like to agree, and i think bernanke is fully cognizant of the 1931 precedent -- but, as was also said above, the bond market may take the decision out of his hands. the curve flattening of recent days has been EPIC -- probably has sent more than a few credit hedges to a watery grave, which is yet another strike against the i-banks.
The FED is screwed as long as they have 536 dip shits in Washington DC continue to borrow money from the rest of the world and spend it like drunken sailors and think it never has to be payed back. This will get much worse after the election and anyone who is holding dollars is going to be damn sorry they are. Monetary policy and fiscal policy are joined at the hip.
Exactly, and it's an unfortunate fact that a majority of that lower and middle class voters who vote, vote for Republicans who have managed to convince them to vote against their economic best interest in favor of hot button social issues like gay marriage and abortion. Voting rates for this demographic are shockingly low.
Not that the Democrats are much better, but the political system would certainly benefit from a greater representation by this demographic. So how do we fix this. Three things are needed:
1 - Compulsory voting. Elections should be held on a national holiday, and it should be mandatory that every eligible citizen vote.
2 - Eliminate private money from campaigns. Move to a public financed system and make political discourse a requirement for broadcasters as part of their FCC license renewals.
3 - Mandatory civil service for all eligible citizens for a fixed period of time. This could be everything from Teach for America, government sponsored R&D, or military/police/civil service.
I can't see the Fed raising rates in the midst of a mortgage meltdown. If Bernanke raises rates and gets blamed for more problems to come, the Fed's independence will be questioned.
The global financial system is a tad more important than a few idiots who bought McMansions they couldn't afford.
Once the oil taps start to really tighten and the world tells the USA "clean up your mess or you're going to be paying $250 a barrel" watch grandma get thrown out in the street, lickety-split.
Bernanke's books and bios make it quite clear he believes strongly in maintaining an inflation rate in the 1-2% range, and in keeping the banking system functioning so as to be able to continue to fund the everyday business of the world.
Everything he's done so far has been completely consistent with those beliefs.
Just start slowly winding down the alphabet soup facilities, or at least stop expanding them. That would be every bit as helpful as a 25 bps hike in 1 months.
jm writes:
Bernanke's books and bios make it quite clear he believes strongly in maintaining an inflation rate in the 1-2% range, and in keeping the banking system functioning so as to be able to continue to fund the everyday business of the world.
Everything he's done so far has been completely consistent with those beliefs.
To contrast that theory, the FED actually follows the markets and they are pricing in an increase.
Imagine what would happen now if no increase was forthcoming.
My personal belief is Ben would be looking for a teaching job again back in Harvard if he did increase.
For "bond market" you may want to consider substituting "People's Republic of China". Hu's you're daddy now.
fair enough, but they've been stalwart through the most recent data. i'd have to suggest that recent movement is trading desks at work (or being put out of work).
the day they are no longer stalwart, though -- that's when the mother of all these bubbles finally pops.
My personal belief is Ben would be looking for a teaching job again back in Harvard if he did increase.
BB | 06.11.08 - 11:10 am | #
__
I suspect by the end of his term or most likely before then, he will 'retire' to spend more time with family or lawyers, or quit for 'health' reasons.
Yal writes:
Fedspeak is hawk so that when they keep rates unchanged market can rally on the good news....
Yal | 06.11.08 - 11:15 am | #
Yes, exactly. Or when they do another emergency 'surprise' rate cut on an options expiration Friday with two hours left in the trading day. A sure signal will occur if the market rallies the Thursday before, then you know the trading desks got the memo to buy. BB is just lowering expectations so it will have more impact when he does cut.
I don't see what is so 'hard' about this 'place'. It should be pretty obvious by now that low(er) interest rates are not going to cure the main problem.
So I think Bernanke et al ought to stop worrying about that vis-a-vis the economy: slowdown vs inflation etc.
Instead they should start worrying about what to do about all the crap paper they now hold as a result of their 'alphabet soup' lending facilities. I mean one day it is all supposed to return to the balance sheets of borrowing institutions, right? And it should be just as obvious by now that the vast majority of those sow's ears are not going to be magically transformed into silk purses.
Take a spike in inflation, sacrifice the dollar, sacrifice the markets, accept higher oil prices, and save the banks (for now).
Sacrifice the banks, pump the dollar, temper oil prices, and keep the monster of inflation under wraps.
Markets seem screwed in either scenario. The fate of the banks may come down to Bernanke's decision on policy going forward. I don't envy his position (or ours) in the least.
I'd be careful to celebrate too soon,
CFTC meeting thursday on oil speculation, if they propose limits to contracts then i'd think the commodities markets will tank big time for the short term.
But other than that heck, gold should be over 900 by now!
In the long term, raising rates won't pump the dollar, but it will save it from going to 0. There's no way that the dollar wouldn't drop after the economy gets killed with higher rates. The sad thing is that this is still the better option. Letting inflation get out of control would be even worse.
I don't know what all the agnst is about here. What's .25 to the situation in general? Do you really think that a token raise will cause all that havoc?
Frankly I'd raise it .25 at the August meeting just to strengthen the cred here if I were Ben. Even at 2.25 the rate is more than accomodative. If it were me here, I'd certainly be ready to show some Euro-trash central bank chair who really has the biggest dick in the game.
I believe the hawkish fedspeak is an "open mouth operation" to support the dollar.
The declining value of U.S. dollar is generating extra upward pressures on the inflation. Declining dollar, rising commodity prices, rising inflation expectations are in the self-feedback loop.
I don't think the Fed will raise the rate. They just wanted to throw a bucket of cold water onto the overheated speculators.
I agree with ipodius. 25bps up isn't going to knock any more apples off the cart than were already going to fall off at this point anyways. I think at this point Ben has fairly good picture of who is going off and who will stay put.
Napolean, absolutely. Raise it .25 in August. Wait it out in September and maybe even October. Raise again when there is no further deterioration in the numbers.
Even .5 on the rate is small potatoes at this point. But speaks volumes in intent.
that's the problem, ipod. the curve steepening trade is the universal play in traderworld -- particularly for banks, who heavily rely on that cost of funding carry as a means of offsetting losses. reverse it -- and more importantly the expectation of it -- and the consequences are potentially devastating.
fwiw -- it's supremely important to realize the depth of the parallels between this situation and most every other onset of credit liquidation. at the risk of repeating a history lesson everyone knows:
in 1930 few considered a depression to be near -- but everyone knew about 'the banking crisis'. the fed cut rates from 600bps in august 1929 to 150bps by the summer of 1931. market reaction in 1930 was initially very favorable -- but that faded after a six-month bear-market rally and deleveraging gained momentum.
then -- and only then -- did runs on the currencies begin in response to the efforts of the british and american central banks to make money easier. the result was first the bank of england raising rates from 250bps to 600bps that fall as currency contagion went global.
the bank of england did not want to raise rates -- it knew the economic consequences were fearsome (and of course they were) of flattening the curve on banks still overleveraged and coping with severe asset liquidity problems. but it had little choice.
the united states probably has even less of a choice. if we signal that we will opt out of defending the currency, the country will face being cut off from the foreign financing on which it is wholly dependent -- forcing a severe and potentially rapid economic contraction. "hu's your daddy", indeed.
i agree with all the folks who say that bernanke would be crazy to raise rates. but if the run on the dollar gains momentum, what choice does he really have?
then -- and only then -- did runs on the currencies begin in response to the efforts of the british and american central banks to make money easier. the result was first the bank of england raising rates from 250bps to 600bps that fall as currency contagion went global.
the bank of england did not want to raise rates -- it knew the economic consequences were fearsome (and of course they were) of flattening the curve on banks still overleveraged and coping with severe asset liquidity problems. but it had little choice.
Both US & UK were on a gold standard then - that was what the currency squeeze then was all about. But fortunately we are no longer on a gold standard - we're on a defacto 'oil standard' instead (think 'floating peg' China-like).
FWIW - I think the only way Ben backs out even semi-gracefully is to raise rates while keeping the TAF open... tightening collateral quality & TAF rate in tandem w/ FF. Slowly. Busy arranging shotgun marriages the whole time.
That's what I would do. We done the quick 'liquidity fix' now its time to face the 'solvency problem' head on. No better time than an election season [/sarcasm].
Kohn is flapping his yap today also. Something about inflation expectations. Bernanke better take the speculators out back to the woodshed and put a bullet in their head, otherwise things are going to get ugly. Time to let some banks die instead of killing the entire economy through prices. Expired
Did anybody catch Paulson's comments that if the dollar did not strengthen, he, Paulson, would have to intervene in the currency markets? Just what does he think he would do? Buy treasuries? With what? Dollars?
The Fed has been irrelevant for years. How long has it been since they surrendered their role as regulator to Wall Street and its leveraged speculators? Everyone knows this. So, why does anyone care about the Fed? It is bankrupt. And so is Wall Street. Fictitious claims do not make sound capital.
What's needed now simply is a citizenry who understands how easily we might resolve the present mess with an orderly bankruptcy reorganization of the entire financial system, saving all that is necessary for promoting productive economic functioning and taxing the living bajesus out of all that is nothing more than parasitic ... like Commodities Index Funds, for example.
To think we can go forward from here making minor technical adjustments -- such as is implied in the debate surrounding Fed interest rate policy -- is pure fantasy.
Good for BB. Acted fast on the way down, should act fast on the way up. Should earn him the fastest shooter in the West award.
If the Fed is strong for cutting one week and strong for raising the next week, the net is that the Fed is seen as not strong at all, but as indecisive and flip-flopping. Bernanke may want to consider not shouldering so much apparent responsibility the next time around - if he is still on the job when that time comes.
Bernanke is also not very adept politically. A more wily chairman would lay off more of the problem onto the politicians - where it rightly belongs.
Instead, by moving out front he becomes the face identified with the problem. That's not where a Fed chairman should be.
Ain't no way in hell the FED will raise rates, That is crazy talk and BS. More cuts and more TAF crap to come.
They have no input into the matter at this point. The bond market will do it for them (I'm sure some will try to spin it as Gross talking book but he would be correct). Look at what happened to the 2/10 in England......
Out of there hands....about time..
Ciao
MS
Market seems to have digested the implications of a rate hike and decided BB is full of sh*t.
Weird Wally Wednesday - expect Volatility to reign today!
fighting a battle against deflation that never was.
wadr to prof. duy -- this is premature. wealth destruction and credit contraction are well underway in the united states and still gaining steam.
what we're seeing is less a classic inflation, imo, than a heavily manipulated currency regime in the dollar sphere that is causing massive inflation outside the US but within the dollar pegs. some of that inflation is then feeding back to the US in the form of commodity prices.
some of that is to be expected -- after all, recessions are all about rising prices in raw materials and unfinished goods vis-a-vis finished goods and still more levered assets.
through that lens, i'd view commodity price increases as a sign of success, not failure. if commodity prices were broadly falling now, given the credit backdrop, we would all rightfully be talking about september 1931. that's really the last time the fed was faced with a currency crisis amid a credit crunch and following an intense series of "stabilizing" rate cuts. in the end, it chose to defend the dollar, raise rates and unwittingly spark the great depression.
This is right out of the first page of the Central Banker's playbook.
Drop rates then pose as an inflation hawk and jawbone rate hikes to try to keep inflation expectations down.
I'm guessing no rate hike anytime soon.
Boston Fed chief says rate cuts and weak dollar have nothing to do with high oil prices.
Boston Fed chief rebuts theory that rate cuts spurred oil prices - The Boston Globe
We are not in good hands.
WM just took back everything from yesterday and then some. WM, WB, LEH - these are dead dogs.
I thought the tough talk on raising rates (which seems to have caused the markets to throw all the toys out of the pram again this morning) was to pop the inflation in commodities.
So, why is oil up again?
Just wondering why we're getting the worst of all worlds...
Duy has been wrong on rates for about 200 bps now. Lehman getting hit again today on rumors they've had to approach the Fed for funding. The Fed should have stopped around 3%, but with the financial crisis still alive and well, it's going to be very hard for them to hike rates this year.
Btw - when I said above to expect Volatility to reign today, I meant up, down, around. Don't be surprised if the Dow, etc., take back most of this morning's decline by the afternoon, only to slam it down during the last hour and a half. That's classic WWW. (Just an FYI)
WM, WB, LEH - these are dead dogs.
they are, but it's more than that. retailers are being slammed. tech is being slammed. a lot of overtraded stocks (including financials) are being routed.
this is less fundamentals at work than systemic deleveraging, imo.
this is less fundamentals at work than systemic deleveraging, imo.
It's both, actually. Check out the YEN today: INO Foreign Exchange - US Dollar/Japanese Yen (FOREX:USDJPY) Price Chart and Quote
In a serious downturn, it's hard to raise rates from a low base.
The Japanese economic bubble popped in 1990. Today, 18 years later, the Bank of Japan's overnight rate target is set at... 0.5 percent.
So, why is oil up again?
if certain high-level israeli ministers with heavy american connections would quit talking about how bombing iran is a foregone conclusion, that would probably help.
gaius marius writes:
So, why is oil up again?
cause crude supplies dropped again!
The hawkish talk is just that TALK..the classic way to "talk-up" something...in this case the dollar. Repeating what several above have stated, there is NO WAY the Fed raises rates this year...no way, no how.
And Professor Duy is wrong about the Fed having no one to blame but themselves. How about blaming this Administration's poor fiscal policy and the unproductive deficit spending that support's the Iraq war....that's what's driving up domestic inflation right now!!
Ok, prediction time...
I predict :-
Anyone else has any ideas?
You know, if you want to talk about someone between a rock and a hard place it is probably best to take a look at the american lower and middle class.
Ben and company are all very rich and probably will retire to Dubai. They know very little about the socalled "hard place".
For example, food stamps are at a record level (other than during Katrina). Living on Food Stamps is a "hard place".
...you got that right 12th
Repeating what several above have stated, there is NO WAY the Fed raises rates this year...no way, no how.
i'd like to agree, and i think bernanke is fully cognizant of the 1931 precedent -- but, as was also said above, the bond market may take the decision out of his hands. the curve flattening of recent days has been EPIC -- probably has sent more than a few credit hedges to a watery grave, which is yet another strike against the i-banks.
The FED is screwed as long as they have 536 dip shits in Washington DC continue to borrow money from the rest of the world and spend it like drunken sailors and think it never has to be payed back. This will get much worse after the election and anyone who is holding dollars is going to be damn sorry they are. Monetary policy and fiscal policy are joined at the hip.
"Monetary policy and fiscal policy are joined at the hip."
Well said...I just wonder why so few acknowledge this FACT.
12th Percentile:
Exactly, and it's an unfortunate fact that a majority of that lower and middle class voters who vote, vote for Republicans who have managed to convince them to vote against their economic best interest in favor of hot button social issues like gay marriage and abortion. Voting rates for this demographic are shockingly low.
Not that the Democrats are much better, but the political system would certainly benefit from a greater representation by this demographic. So how do we fix this. Three things are needed:
1 - Compulsory voting. Elections should be held on a national holiday, and it should be mandatory that every eligible citizen vote.
2 - Eliminate private money from campaigns. Move to a public financed system and make political discourse a requirement for broadcasters as part of their FCC license renewals.
3 - Mandatory civil service for all eligible citizens for a fixed period of time. This could be everything from Teach for America, government sponsored R&D, or military/police/civil service.
And i just heard some analyst said an hour ago that the Dollar has bottomed.
Wow, what's he been drinking.
Da man has given you 325bp since Sept. Can't he take back 25bp? Please. Pretty please.
I can't see the Fed raising rates in the midst of a mortgage meltdown. If Bernanke raises rates and gets blamed for more problems to come, the Fed's independence will be questioned.
EIA report: 4m draw in crude (pretty big), slight build in gasoline and a more meaningful one in distillates.
Oil up about a buck.
No evidence of relief for gasoline prices in this report.
Ed H:
The global financial system is a tad more important than a few idiots who bought McMansions they couldn't afford.
Once the oil taps start to really tighten and the world tells the USA "clean up your mess or you're going to be paying $250 a barrel" watch grandma get thrown out in the street, lickety-split.
Bernanke's books and bios make it quite clear he believes strongly in maintaining an inflation rate in the 1-2% range, and in keeping the banking system functioning so as to be able to continue to fund the everyday business of the world.
Everything he's done so far has been completely consistent with those beliefs.
Just start slowly winding down the alphabet soup facilities, or at least stop expanding them. That would be every bit as helpful as a 25 bps hike in 1 months.
jm writes:
Bernanke's books and bios make it quite clear he believes strongly in maintaining an inflation rate in the 1-2% range, and in keeping the banking system functioning so as to be able to continue to fund the everyday business of the world.
Everything he's done so far has been completely consistent with those beliefs.
To contrast that theory, the FED actually follows the markets and they are pricing in an increase.
Imagine what would happen now if no increase was forthcoming.
My personal belief is Ben would be looking for a teaching job again back in Harvard if he did increase.
MS - "The bond market will do it for them"
For "bond market" you may want to consider substituting "People's Republic of China". Hu's you're daddy now.
Fedspeak is hawk so that when they keep rates unchanged market can rally on the good news....
Estragon writes:
Hu's you're daddy now.
Aptly put.
For "bond market" you may want to consider substituting "People's Republic of China". Hu's you're daddy now.
Aren't we still the center of the universe?
For "bond market" you may want to consider substituting "People's Republic of China". Hu's you're daddy now.
fair enough, but they've been stalwart through the most recent data. i'd have to suggest that recent movement is trading desks at work (or being put out of work).
the day they are no longer stalwart, though -- that's when the mother of all these bubbles finally pops.
Hu's you're daddy now.
You've got my vote for best one liner of the year.
Aren't we having an increase in dyslexia rates in this country?
Because lately Americans have gotten confused between "boom" and "doom". Those b's and d's. So confusing.
The Fed must maintain the positively slopped yield curve. If the long end starts to rise, THEN they will follow it up with the short end.
And not before.
Outsider writes:
Aren't we having an increase in dyslexia rates in this country?
Because lately Americans have gotten confused between "boom" and "doom". Those b's and d's. So confusing.
den dernanke?
My personal belief is Ben would be looking for a teaching job again back in Harvard if he did increase.
BB | 06.11.08 - 11:10 am | #
__
I suspect by the end of his term or most likely before then, he will 'retire' to spend more time with family or lawyers, or quit for 'health' reasons.
Yal writes:
Fedspeak is hawk so that when they keep rates unchanged market can rally on the good news....
Yal | 06.11.08 - 11:15 am | #
Yes, exactly. Or when they do another emergency 'surprise' rate cut on an options expiration Friday with two hours left in the trading day. A sure signal will occur if the market rallies the Thursday before, then you know the trading desks got the memo to buy. BB is just lowering expectations so it will have more impact when he does cut.
Fed's Kohn says :
Best policy right now might be higher inflation and higher unemployment.
Looks like no raising of rates.
I guess Ben folded, Trichet wins this round.
Err.. guys when you all comment "BB" (when you mean "BEN")says this or that.. I kinda feel flattered and insulted.
Either you change "BB" to "BEN" or I will have to change my name.
I am betting you will change. Don't make me go Verbal again
I second Sonic Suess
I expect we will see "hu's your daddy now" pop up in the traditional media at some point in the future.
very funny. And true.
raise rates? not gonna happen.
all we need is the first >400k jobless claims and all the talk of a rate hike is over.
I don't see what is so 'hard' about this 'place'. It should be pretty obvious by now that low(er) interest rates are not going to cure the main problem.
So I think Bernanke et al ought to stop worrying about that vis-a-vis the economy: slowdown vs inflation etc.
Instead they should start worrying about what to do about all the crap paper they now hold as a result of their 'alphabet soup' lending facilities. I mean one day it is all supposed to return to the balance sheets of borrowing institutions, right? And it should be just as obvious by now that the vast majority of those sow's ears are not going to be magically transformed into silk purses.
like thoth wrote last night, and i agreed then....many more of the debts due cost less under the inflation scenario.
plus i would add, Ben has a choice defend the economy or defend the currency (or as dryfly pointed out, do neither)
ben wont go down the road marked 1929
Ben can go take a hike....not!
This is turning into a Sophie's Choice:
Markets seem screwed in either scenario. The fate of the banks may come down to Bernanke's decision on policy going forward. I don't envy his position (or ours) in the least.
Add: although option #2, may also include a depression if enough banks fail. Not a minor detail.
after Ben and Hanks recent big "defend the dollar" jawbone session...
which hammered gold that day...
one day later, gold up 10$ since london opening.
so much for street cred
I see Wamu now at $6.05, but it was as low as $5.75 today. Don't they de-list a stock if its price gets too low, or something?
mock turtle writes:
one day later, gold up 10$ since london opening
I'd be careful to celebrate too soon,
CFTC meeting thursday on oil speculation, if they propose limits to contracts then i'd think the commodities markets will tank big time for the short term.
But other than that heck, gold should be over 900 by now!
estragon-
line of the year......
I'm sure many will agree.
Spit out my coffee.....
Ciao
MS
BB
your right...i'm not doing the dance...just thought that, wow one day later, and the magic is wearing off.
i don't KNOW what PMs and esp gold will do...i just have suspicions.
i do my homework, but realize i'm guessing about the hidden size and shape of the iceberg based on the small part i can see.
TM,
In the long term, raising rates won't pump the dollar, but it will save it from going to 0. There's no way that the dollar wouldn't drop after the economy gets killed with higher rates. The sad thing is that this is still the better option. Letting inflation get out of control would be even worse.
Quote of the day. Sent it to my friends.
For "bond market" you may want to consider substituting "People's Republic of China".
Hu's you're daddy now.
ROFLMAO
I don't know what all the agnst is about here. What's .25 to the situation in general? Do you really think that a token raise will cause all that havoc?
Frankly I'd raise it .25 at the August meeting just to strengthen the cred here if I were Ben. Even at 2.25 the rate is more than accomodative. If it were me here, I'd certainly be ready to show some Euro-trash central bank chair who really has the biggest dick in the game.
I believe the hawkish fedspeak is an "open mouth operation" to support the dollar.
The declining value of U.S. dollar is generating extra upward pressures on the inflation. Declining dollar, rising commodity prices, rising inflation expectations are in the self-feedback loop.
I don't think the Fed will raise the rate. They just wanted to throw a bucket of cold water onto the overheated speculators.
The ultimate proof of the superiority of capitalism over communism....we sell our country to China.
Waitress!! More irony!! I need more irony over here!
I agree with ipodius. 25bps up isn't going to knock any more apples off the cart than were already going to fall off at this point anyways. I think at this point Ben has fairly good picture of who is going off and who will stay put.
Napolean, absolutely. Raise it .25 in August. Wait it out in September and maybe even October. Raise again when there is no further deterioration in the numbers.
Even .5 on the rate is small potatoes at this point. But speaks volumes in intent.
This is an election year and no candidate is going to embrace higher interest rates. The Fed will chicken out. Big talk is all we will see.
But speaks volumes in intent.
that's the problem, ipod. the curve steepening trade is the universal play in traderworld -- particularly for banks, who heavily rely on that cost of funding carry as a means of offsetting losses. reverse it -- and more importantly the expectation of it -- and the consequences are potentially devastating.
If the Fed raises rates, the stock market crashes and the dollar falls.
fwiw -- it's supremely important to realize the depth of the parallels between this situation and most every other onset of credit liquidation. at the risk of repeating a history lesson everyone knows:
in 1930 few considered a depression to be near -- but everyone knew about 'the banking crisis'. the fed cut rates from 600bps in august 1929 to 150bps by the summer of 1931. market reaction in 1930 was initially very favorable -- but that faded after a six-month bear-market rally and deleveraging gained momentum.
then -- and only then -- did runs on the currencies begin in response to the efforts of the british and american central banks to make money easier. the result was first the bank of england raising rates from 250bps to 600bps that fall as currency contagion went global.
the bank of england did not want to raise rates -- it knew the economic consequences were fearsome (and of course they were) of flattening the curve on banks still overleveraged and coping with severe asset liquidity problems. but it had little choice.
the united states probably has even less of a choice. if we signal that we will opt out of defending the currency, the country will face being cut off from the foreign financing on which it is wholly dependent -- forcing a severe and potentially rapid economic contraction. "hu's your daddy", indeed.
i agree with all the folks who say that bernanke would be crazy to raise rates. but if the run on the dollar gains momentum, what choice does he really have?
I think Dr. Ben would be wise to resign now and tend carefully to the fragile remaining shreds of his reputation . . . . .
then -- and only then -- did runs on the currencies begin in response to the efforts of the british and american central banks to make money easier. the result was first the bank of england raising rates from 250bps to 600bps that fall as currency contagion went global.
the bank of england did not want to raise rates -- it knew the economic consequences were fearsome (and of course they were) of flattening the curve on banks still overleveraged and coping with severe asset liquidity problems. but it had little choice.
Both US & UK were on a gold standard then - that was what the currency squeeze then was all about. But fortunately we are no longer on a gold standard - we're on a defacto 'oil standard' instead (think 'floating peg' China-like).
FWIW - I think the only way Ben backs out even semi-gracefully is to raise rates while keeping the TAF open... tightening collateral quality & TAF rate in tandem w/ FF. Slowly. Busy arranging shotgun marriages the whole time.
That's what I would do. We done the quick 'liquidity fix' now its time to face the 'solvency problem' head on. No better time than an election season [/sarcasm].
I'm still amazed every time I hear talk of how " the US is the richest country on Earth".
Umm...no we're not.
9 trillion in federal deficit, crumbling infrastructure, crumbling schools, a negative savings rate for everyone...
So how do people say this with a straight face?
Any idea how long the strong dollar stragegy is in effect for?
Kohn is flapping his yap today also. Something about inflation expectations. Bernanke better take the speculators out back to the woodshed and put a bullet in their head, otherwise things are going to get ugly. Time to let some banks die instead of killing the entire economy through prices.
Expired
Did anybody catch Paulson's comments that if the dollar did not strengthen, he, Paulson, would have to intervene in the currency markets? Just what does he think he would do? Buy treasuries? With what? Dollars?
The Fed has been irrelevant for years. How long has it been since they surrendered their role as regulator to Wall Street and its leveraged speculators? Everyone knows this. So, why does anyone care about the Fed? It is bankrupt. And so is Wall Street. Fictitious claims do not make sound capital.
What's needed now simply is a citizenry who understands how easily we might resolve the present mess with an orderly bankruptcy reorganization of the entire financial system, saving all that is necessary for promoting productive economic functioning and taxing the living bajesus out of all that is nothing more than parasitic ... like Commodities Index Funds, for example.
To think we can go forward from here making minor technical adjustments -- such as is implied in the debate surrounding Fed interest rate policy -- is pure fantasy.