The consumer is in real trouble with high fuel prices eroding spendable income. Higher rates have to hurt unless this does cause the dollar to rally enough to lower oil prices. Seems like a long shot.
I think this is just chest thumping by the Fed. My guess is they don't start raising rates until after Christmas and the New Year. Which just reminded me, I wonder how nasty Christmas retail sales are going to turn out...?
Is this a joke? A rate hike? BB and co. will lower rates before Sept.
These guys are pathetic. Two new books 'Greenspan's Bubbles' by Bill Fleckenstein and Charlie Morris' 'The Trillion Dollar Meltdown' are truely accurate. Read them and you WILL weep.
Maybe this new measure also takes into account things like food and energy which already seem out of control.
Who knows, maybe, just maybe if the Fed is willing to admit that SOME bubbles should be popped, then perhaps they are also ready to admit that current monetary policy is based on the wrong inflation index...
I think one should be careful reading too much into a short term move in expectations, especially during turbulent times. They can reverse just as quickly.
A dangerous game being played by Benny and the Feds... they are trying to control inflation expectation by talking tough, and the market is grudgingly giving them the benefit of the doubt. If they don't raise rates, it diminishes the value of their empty rhetoric for future "inflation expectation" management, and basically encourages the market to find their own metric for inflation expectations. If they do raise rates, they risk getting crucified for prolonging and deepening the recession, and a market backlash which will force another reduction by year-end.
Boy, I wouldn't want to be in Benny's position when he's eventually hauled in front of Congress and asked how he could have f-ed this up so badly...
"Who Will Feel The Downgrades Of MBIA And Ambac, And By How Much"
Money Market Funds
In our view, the deterioration of the creditworthiness and the resulting downgrades of MBIA and Ambac should not require money-market funds to reduce exposure to tax-exempt or taxable municipal securities backed by these entities
It's easy. BB just has to wait for another bank to fail (LEH?), and then he can excuse another rate cut as an unforeseen measure. Then they can save face.
A rate hike is not only possible it is becoming probable. The Fed is impotent and only controls a meager 19% of global money supply. This is a dramatic change from just a few years ago. They don't set rates, the market does. And to the extent that the Fed is able to convince everyone that they are in charge and actually do set rates, well...that is a testament to their persistent powers of deception.
"A rate hike is not only possible it is becoming probable. The Fed is impotent and only controls a meager 19% of global money supply. This is a dramatic change from just a few years ago. They don't set rates, the market does. And to the extent that the Fed is able to convince everyone that they are in charge and actually do set rates, well..."
An interesting idea. But how does it work? What unbending pressure does the Fed bow to in this case, and who is it coming from?
Unfortunately, the Fed. has learned it is more better to climb a tree and tell a lie than stand on the ground and tell the truth. Expect nothing and you will not be dissapointed.
Its probably best for borrowers that BB leaves short term rates low, as its done wonders for accelerating inflation.
IMHO, no way BB raises rates. This guy is not an inflation hawk, and he's the same guy that cut rates 75bps in the spring when he saw Dow futures down 500.
They are just trying to manage inflation expectations by talking tough.
If they really fired a 25 hike its just for show to try and head off an unmooring of long term inflation expectations. They would fire it off in hopes that the threat of more would manage things. Lots of talk, little action.
I think raising rates is possible if Bernanke thinks it will burst the commodities bubble.
Lowering rates only works if it spurs borrowing to buy homes and thereby prevents the collapse of home prices.
Well now the home prices have already collapsed....rate cuts didn't work.
Since more home price drops will occur despite rate cuts, he might as well lower fuel costs.
Bernanke was the one who suggested checks in the mail to the consumer. Preventing fuel hikes, or even getting the prices lower may do more than rates could.
Rate cuts were to save the financials...now that they have found other ways to do that, they can now concentrate on saving the consumer.
Bob Dobbs, that is a lengthy discussion but I'll give you the quick summary. As the US economy slows, the FCB's have been printing like mad to make up the difference and have been sterilizing by buying treasuries and agencies to the tune of $10-20B/week. All of this printing (of which the Fed hasn't been involved in directly) is causing a global hyperinflation and crack-up-boom in those foreign currencies. The blow-back effects of this can be seen in the global commodities market ($130 oil, food hoarding, etc).
Meanwhile, you have a Fed that is bent on destroying their own balance sheet by taking on L3 and other dodgy assets and exchanging for treasuries and the Treasury itself that is bent on ballooning their debt by stimulus packages and other nonsense. The Treasury is exceeding their own independent financing projections on a WEEKLY basis by many billions!
Normally, when you have an out-of-control Treasury that is continually at the trough, the logical response is for the global markets to demand higher rates to account for the risks (default, inflation, etc.) But such a response has not been forthcoming due to endless dollar-recycling and phony demand by the FCB's which acts as a lid on interest rates (see above.)
Put it all together and you can see that this is an unstable arrangement and the FCB's will say "NO MAS!" at some point. Whether the barbarians will be storming the palace gates at that point is really up to them.
So the unbending pressure is not that the FCB's wouldn't want to see this ill-conceived currency regime continue, but that the hyperinflation blow-back is causing social unrest and chaos in those countries and the only solution is for them to take a pass on more worthless US paper and stop the recycling operations. One by one the FCB's will take a pass.
Once the FCB's discontinue the recycling, the bond market (and GSE's) collapse and interest rates skyrocket. The Fed will try to manage this re-balancing process by giving the illusion that the recession is behind us and that inflation is the primary concern (hawkish jaw-boning) but the reality is that the global market will make the decision on when rates rise and how much.
I wouldn't be surprised one bit if they raised rates later this summer... Heck I wouldn't be surprised if they did it TOMORROW!
The question you have to ask is 'are they confident they have made sufficient liquidity available?' and 'do they think the immediate crisis is behind us?' Considering all the windows they have open I'd guess the answer is 'yes - they think it is under control'. If so then pull the trigger whenever.
And a quarter point or even a half point - quick, out of the blue - might be enough to put fear in the risk-loves without completely killing off the sickly banks.
It might also send a message to banks using the liquidity to play speculate instead of clean up, reinforcing BB's recent theme: "if you banks need recapitalization, you better get it done NOW while you still can". Else these guys really will be permanent fixtures at the window in between their rolls at the craps table.
It really depends on what the fed govs objectives were for the cuts in the first place (not what they said in the minutes but real intentions IF they had them). If it was only for liquidity as they said then are we now liquid enough?
Would I bet they raise tomorrow? No chance! Would I be surprised if they did? Not really - the environment is way too weird to be surprised by anything they do right now.
If it was only for liquidity as they said then are we now liquid enough?
Can you find any quote from any Fed communication saying the rate cuts were for liquidity?
I thought they were pretty consistent in separating the goals and the mechanisms... Rate cuts are to "promote moderate economic growth over time", while the new tools (TAF/TSLF/PDCF/XYZPDQ) are to provide liquidity. To my knowledge, the Fed has remained fairly on-message about this distinction.
I don't understand all the complicated reasons, but looking at it as a layman: Let's say the Fed's goal is to avoid or limit the effects of recession/depression. If the Fed lowers rates to stimulate borrowing, that also lowers the US dollar and consumers feel the gas pinch and cut back on spending, causing a downward economic spiral. If instead the Fed raises rates, that raises the cost of borrowing, again causing the downward economic spiral.
Bascially, Bernake has to somehow balance on a razor's edge between the two. Assuming there is an edge, it's hard to tell...
What are you people talking about? Take a step back and think...the enormous debt is best serviced with depreciating $$. It's the least painful option. When the smoke evaporates, rates will be coming down. BB has NB (no balls). Here's a unique opportunity to short the US$ in the near term.
This preemptive jaw boning to see i they can keep the dollar from crashing.
If this doesn't work they will have to raise rates or commodities, including oil, will take another large leg up putting a stake through the heart of any recovery while precipitating a price panic that will send the world economy into a downward spiral.
I'm choosing the "raise rates and pop the commodity bubble" side of the razor as a preference.
The panic in the public over higher food and gas costs is getting palpable and it's creeping me out.
Plus, perhaps higher costs for borrowing would actually encourage some lenders to start lending again. Lots of risk in lending low at this time- as if we don't already know that.
I thought they were pretty consistent in separating the goals and the mechanisms... Rate cuts are to "promote moderate economic growth over time", while the new tools (TAF/TSLF/PDCF/XYZPDQ) are to provide liquidity. To my knowledge, the Fed has remained fairly on-message about this distinction.
Nemo | Homepage | 06.10.08 - 7:39 pm | #
Then probably all the more reason they think they could start inching rates up.
I mean 2% is a pretty damned low rate historically speaking and while the economy isn't perfect it isn't a complete mess... except for that little problem with liquidity which the windows are addressing very nicely as you point out...
And since it takes time for the cuts/hikes effect to be felt (say 6-9 months yes/no?)... then what's holding them back now?
Unless they know or believe more than is in the message.
@Darth,
I understand your points BUT the FCB's especially Euro are itching to cut rates in my opinion. Refusing to recycle dollars and causing massive interest rate increases here would give them the 'cover'. But the FED is as you know impotent. Typically they follow markets.
I'm in my fifth decade in this business and I'll swear this is the without doubt the most bizzare situation as I've ever seen. Finance during WWII was eccentric but at least we had a common enemy. Now the enemy are...who?
There's a simple reason the Fed cannot engage in a rate hike campaign. It has to do with the little-understood way in which the Fed injects liquidity.
At a 2% Fed Funds rate, the monetary base is stagnant. There is no net demand for funds from the banking system.
At a 2.5% FF rate (2 hikes), there would be even less demand for funds from the system. The Fed would likely have to WITHDRAW funds to keep Fed Funds from declining below the 2.5% target. This means the monetary base would SHRINK.
So, the market proposes that the Fed set a rate at which the monetary base would shrink while the banking system remains fragile and consumers desperately need access to credit. This is highly unlikely to occur. Why? Because it is the very thing that Ben Bernanke criticized the 1930's Fed for doing. In fact Bernanke made his academic career through that critique.
I'm in my fifth decade in this business and I'll swear this is the without doubt the most bizzare situation as I've ever seen. Finance during WWII was eccentric but at least we had a common enemy. Now the enemy are...who?
Ross | Homepage | 06.10.08 - 7:55 pm | #
The Fed Reserve exists to insure the survival of the banking system...not the peons. There is no banking system without a non-inverted/flat yield curve(when you're entire business model is dependant on borrowing short and lending long). Period!
No hikes while Helo-Ben and co. are running the show. Not-gonna-happen.
What the fed does is mostly irrelevant at this point. But, having talked tough on inflation and the dollar, if the Fed don't follow it up with actions, people will chase the governors with pitchforks in hand.
I am somewhat puzzled that the bond market hasn't yet decided the issue by jacking up yields and melting down prices. Who is buying 10 and 30 year issues at this point ? And who is buying non-sovereign debt ?
The runup of commodties has 3 catalysts - demand (and I can't believe demand suddenly doubled in 12 months), weak dollar and the total loss of faith that the Fed will be able to control inflation (which has driven investors towards commodity indexes as an inflation hedge). The commodity price spike caught the Fed with it's collective pants down. Bernanke and Co. were hoping that -ve real interest rates would reflate the housing bubble and buy them more time for a "soft landing".
Isn't this the same Fed that said Subprime was contained last summer and everything was going to be alright? I can't believe that the market still gives these yahoos any credibility.
Ben and stooges are all wimps and would not dare to raise rates before an election or even after.
Fool me once shame on you fool me twice shame on me....
(CNBC) "The Federal Reserve hopes tough talk on inflation will do the job of moderating price increases."
All members of the "Inflate-Or-Die" Secret Society (mostly gov't employees) know that given enough time to talk inflation, otherwise intelligent citizens can be persuaded to:
1)Fill the car gas tanks before gas hits $5.
2)Buy a 40 pound sack of rice before CostCo runs out.
3)Get that money of out savings and buy stuff now before their dollars buy less.
4)Stop saving for next year's new car and buy it now before the payments get too high.
5)Consider making an offer on that house they've been looking at, before mortgage rates get too high.
Society members know that Japan tried this unsuccessfully for 17 years but failed to provide the rising prices and increasing interest rates that are required to initiate citizen involvement, sabotaging their effort with the very misguided ZIRP policy, thought necessary to flush money out of savings. Members are thoroughly trained to give as much time to talking up higher interest rates as to talking higher prices.
Members who attain the highest levels of achievement, such as being appointed to the Federal Reserve Board, receive the coveted lifetime "Hawk Talk" award at a secret ceremony.
Whenever it arises, Society members are taught to thoroughly debunk phrases such as "THE ONLY THING WORSE THAN INFLATION IS TALKING ABOUT IT!", or "INFLATION IS LIKE PREGNANCY - IT'S HARD TO HAVE A LITTLE OF IT".
peAkcredit | 06.10.08 - 7:56 pm | #
"there would be even less demand for funds from the system."..."This means the monetary base would SHRINK."
$270B sloshing including the TAFs is very healthy demand. The Fed keeps dumping more money in to support the base. At $50B in the last month, the Fed has to be getting nervous. The growing elephant is the solvency issue. It seems many are ignoring this continuing consumption of the Fed's balance sheet. Countrywide is offering 3.75 - 3.9%. 2.25% is far more attractive. It will be interesting to see if the Fed drops their collateral requirements.
Bernanke won't raise rates. He won't do the right thing. He's a college professor. (You know the famous quote: they're all pointy-headed intellectuals who don't even know how to park a bicycle straight.) Bernanke received a Ph.D. for his work, so he thinks he's right.
The entire Ivy-league academic world operates on the principle of endless inflation. They charge more every year, with no resistance or repercussions, since government programs and donors inflate the budgets. Since the mid-1970s, inflation overall has increased 200% while Academia has raised its prices 500%.
I don't buy the argument that the Fed didn't realize TAF and lower rates wouldn't spike the commodities market. I expect they counted on it - to stoke inflation fears as they headed for ZIRP, prevent more widespread deflation, and mostly to allow the IBs to recapitalize.
Good point, I'm waiting for college education to deflate just like everything else that was built on easy credit. But so far, no luck.
Somewhat n00b question:
What is the main reason that preventing the Fed from raising rates? As it's been pointed out, the windows are providing the liquidity for the IB's to clean up their books. Is the Fed really still trying to stimulate the economy? Other than necessities, no one I know is buying anything. Either we're broke, minimalists, content, or prepping for armageddon.
Maybe the Fed is going to turn over a new leaf and get tough on inflation. We've all been kvetching about it here for a long time. Maybe the Fed has come around to our way of thinking. They need to prove it by following through with at least one rate hike in the next couple months.
The Fed does not yet know. They will not make decisions until they meet and discuss them. Talk now by Bernanke is worth only one thing: it may influence expectations, therefore actions. If the US clearly slides into recession, the Fed simply cannot raise rates. Barnanke's talk aside, nothing fundamental has improved in the last four weeks.
I'm impressed by the sheer gall of expecting loans from the Fed for B/Ds, but..."please, don't trouble us with all that oversight rubbish you impose on member banks."
(CNBC) "The Federal Reserve hopes tough talk on inflation will do the job of moderating price increases."
Since CNBC is ALWAYS WRONG on pretty much EVERYTHING, it's more likely that the Fed actually believes what it's saying and is seriously considering raising rates because they think that's what the markets need . . . . . . . fools they are.
Is it me, or does Thain bear a striking resemblance to Stephen Colbert?
"You can't take rules created for one type of financial institution and apply them to another. There have to be rules appropriate for the type of business," he said.
No, of course not, wouldn't think of it. But I do wish he would elaborate. For example, if your business is the type that buys dodgy loans, rolls them into "AAA" rated securities, and then sells those on to pension funds... then what kind of rules would be appropriate before letting you tap the central bank's balance sheet?
Yeah, to be fair, I'd say those two sentences of his argument are perfectly legit.
However...if you want to play, you have to pay.
Also, past experience with CEO "too much regulations" arguments makes me picture him as Wimpy from Popeye saying; "I'll gladly pay you Tuesday for some bailout cash, today!"
speaking of inflation...
i just rented a car from Avis in San Francisco. the clerk was printing the reciept and took a double look at his computer. then he turned to the wall behind him and raised the Avis gas rate to $4.39 a gallon. He turned to me and said that was the third time TODAY he had to do that (upon instructions from his computer). He started the day at $4.17.
Other than the discount rate, the FED does NOT control rates. It sets a targeted rate. That's all. But right now, the market is leading the Fed, already higher than the Fed's current target. All this talk about is the Fed going to raise rates is ridiculous. Sometimes the Fed properly leads the market, controlling through SOMA operations, other times, as now, the market leads it.
Inflation may be real but so is the profit from my financials shorts and I do not believe that they are done going down. Write offs and much pain lie ahead, in the U.S., UK, even Canada which has heretofore been relatively unscathed.
They are jawboning and nothing else. A temporary halt to the greenback slide.
Aided and abetted, a bit, by Mark Carney, governor of the Bank of Canada, today. Situation on this side of the border is somewhat different.
The Fed--Bernanke in particular--made a huge mistake in not opposing the absurd and damaging tax rebates. I think Bernanke went along with it because he had no political captial, after being so far behind the curve on the housing bust. Who knows? Maybe he actually believes in Keynesian fiscal policies. But the tax rebates will help China more than the US: the US borrows money from China, sends out checks to Americans, who buy goods made in China. We keep the retail commissions!
So raising rates is bad because it raises the cost of borrowing, thereby hurting the economy. But keeping rates low is also bad because it fuels inflation, undermines the dollar and thereby makes oil and other important things too expensive, which hurts the economy.
Maybe this economy is just sick, and neither of the two medicines available to the Fed is the right cure.
Maybe this is what Dr. Roubini and others were trying to tell us: It's a solvency crisis, not a liquidity crisis.
It's important to keep in mind that rising prices aren't necessarily inflation, any more than falling prices (e.g., those of electronic gear) are necessarily deflation. Inflation is prices rising due to the money supply expanding more rapidly than the quantity of goods and services available to be bought. Price rises due to increased competition for scarce resources are not inflation. In a truly inflationary environment, wages rise along with prices.
Since the failure of wages to rise along with prices is exactly what most people are complaining about, we have a fairly good indication right there that we aren't in a severely inflationary environment.
I can clearly remember back when I was fifteen years old -- forty-five years ago -- thinking that since essentially all Americans are descended from fairly recent immigrants, who probably weren't all that much more able than others in the nations from which they came, the major factors making the US so much wealthier than those nations were probably its less-depleted natural resources and its having escaped devastation in WWII, and that my fellow Americans were living in a fool's paradise by taking our superiority and standard of living for granted, with a sense even of entitlement. Someday, I was sure, we would find ourselves competing on equal terms with a recovered Europe and Asia for markets and resources.
Those days have come. And we've not prepared for them.
But the tax rebates will help China more than the US: the US borrows money from China, sends out checks to Americans, who buy goods made in China. We keep the retail commissions!
And we pay the interest. During an earlier Republican debate, Mike Huckabee (of all people) made that point, opposing the stimulus: I think his language was, "just make the check out to china and save postage"
Nemo writes:
They may just be trying to prick the commodities bubble. Interesting that the market is taking the tough talk seriously, though.
Nemo | Homepage | 06.10.08 - 6:54 pm | #
Remember, this is the same market that believes the headline CPI is true, believes unemployment really is 5.50%, and that the housing market has bottomed.
This was the same Fed that said subprime was contained, the economy would grow moderately, and that inflation was well anchored.
Bernanke, a student of the Great Depression, said that Fed made the mistake of raising rates back then. I can't imagine him doing that with unemployment rising and the economy rapidly going over the cliff.
I say no way he's raising rates, but yet the market won't call his bluff. It amazes me the market trusts anything the Fed says, but then again, look at all the wizards at Lehman, Bear, CountryWide, Wamu, etc. He's their bitch, the next move is a rate cut, which will be a 'surprise' and good for a 400 point rally.
Actually it's ridiculous to frame this question as "Will the Fed raise or lower rates" because the Fed clearly follows the short end of the market, as many others have pointed out. So the question needs to be "When will the short end tank again?" and I say before August, and definitely below 1% by year's end.
For the past year I've believed we would have both inflation and deflation rather than one or the other, and whichever one second would be worse and longer lasting.
As far as the Fed not being able to raise rates, they can and they should. This is the like the BOE's failed ERM interest rate policy. When Soros (who gets the credit but it was Stanley Druckenmiller's idea - Soros just pushed him to do it in bigger size) shorted the pound and it broke it ushered in a terrible recession. Initially the Brits were pissed at this currency speculator causing them pain, but in the long run the economy was able to purge it's inefficiencies and become healthy.
The Fed needs to hike rates signficantly. I think they should raise them to 3.25 - probably a neutral rate. This may cause some bankruptices, but we too need to purge our inefficiencies and get on with it.
Who gives a shit about housing? Newsflash - houses don't make money. Inventing things does. We don't even have to manufacture them, but we do need to own the idea, sell it to the world and bring money back home from it.
The best thing that could happen is for housing to get crushed so badly that people forgot about making money off of houses for at least a generation.
My post may be a bit disjointed. My point was that the US gov't today is spending money defending housing (a major inefficiency) just like the BOE spent a ton of money defending a currency peg to a basket of Europe (a major efficiency).
A good inflation scare in the interest rate markets may do for us what Quantuum Funds did for England.
There's no better way to fight cost-push inflation. The Fed can either target on GDP or price.
The Fed first targeted on GDP by increasing money supply to increase demand. But the subquence is that price level went up and induced further oil price hike.
The Fed now has to target on price stability by letting the GDP decrease (recession) to maintain the price level and stop the upward spiral of oil price.
The ideal way is that Fed have the credibility to fight inflation such that the market would not speculate price increase. That's why there're so much talking on strengthening the dollar now. But it seems to be a little late now.
This may cause some bankruptices, but we too need to purge our inefficiencies and get on with it.
I second.
If we're going to purge and cause hurt, we need to get rid of SS and Medicare. When those programs become cash negative in a couple of years, it will hurt bad; much worse than anything now. We're already spending over 55% of the annual budget on the two entitlement programs, and 4/9 of our entire debt is owed to these trust funds. To make matters worse, the Boomers enter during a recession.
I agree that Americans have been living in a fool's paradise regarding our economic productivity relative to the rest of the world.
The collapse of the credit bubble is making it painfully obvious that we have become a Hollow Giant in the world economy. We are probably in the process of imploding, big-time.
And most of our economic problems are structural, and the Fed can't solve them by manipulating the Federal Funds Rate.
What does it say that the new president of Russia was the Chairman of Gazprom? Wonder if he's still pissed that Reagan called his country the "Evil Empire." Now who's laughing.
If the US clearly slides into recession, the Fed simply cannot raise rates.
A recession is a contraction in the real economy.
Interest rates concern pieces of paper that in an ideal world have some connection with the real economy.
Consider, perhaps, that the real economy is sliding into a recession precisely because the pieces of paper that make up the various instruments in our financial are losing their relationship to reality.
If so, does it make sense to focus on those pieces of paper as a means of controlling and somehow improving the real economy?
It seems to me like everybody is screaming that we need to pull back on the stick extra hard even though it's becoming more and more apparent that the real problem is the control wiring is burnt out and the instrument panel is giving false readings.
I think this sort of financial tunnel vision is what got us the death sentence in the 1927 slowdown. We cut rates and in the end just more grossly distroted the real economy.
Will $200 oil become a self-fulfilling prophecy? The administrative assistant in my friend's office had a nervous breakdown (sobbing) today over how much it is costing her to commute -- with prices as they are now...
Always happy to see the saw about the entitlement programs brought out like a dead horse.
Never mind a trillion dollar off-budget piss in the sand box that is Iraq, never mind a military budget that is so far out of proportion it actually creates our GDP "growth", never mind tax cuts that polarize the population by increasing the wealth of the top one percent of one percent, never mind gutting the entire regulatory function of market watchdogs so crooks can run wild, never mind taking junk for treasuries which are then used to gamble on commodities and drive the middle class into poverty - nope.
Just can't have those entitlement programs. Health, education, a small retirement security after contributing all your life - can't have any thing that irresponsible.
If the point of this financial debacle is to drown those programs in a bathtub, then it's time drown the fat cats. The middle class built this country and we'll get our share as sure as the pigs and crooks walking away with million dollar bonuses. Just try screwing with those programs again - privatization anyone? The neocons and repuglicans will be thrown to the other side of the sun.
I think for starters we could repeal the prescription drug benefit plan. That was a pissing match of "who can buy the AARP's vote" in 2004 to become President. AARP is almost as awesome as the ACLU defending child molestors "rights".
The prescription benefit drug plan accounts for 17% of future entitlement liabilities and nobody has "paid into it" so there shouldn't be much screaming about giving it up.
What are you people talking about? Take a step back and think...the enormous debt is best serviced with depreciating $$. It's the least painful option. When the smoke evaporates, rates will be coming down....
thoth | 06.10.08 - 7:42 pm | #
yeah the fed could kick it a quarter or two but i doubt we see 4% any time soon.
This has been his playbook since last summer. HES NOT RAISING RATES!!!
The real story IMO is looming insolvency and asset price deflation spreading into a global slowdown. The oil/commodity spike was expected, but perhaps not at this intensity. They know things are really f'ed up, and they expect that when deflation goes global the commodity fire will burn itself out.
The oil spike is one chapter in a very very very long and drawn out train wreck.
By jawboning, they are attempting to manage the decline to preserve their power and allow the right players to properly position themselves. Can't have things go berserk and disorderly just yet.
In case of sudden rate cut as suggested by dryfly earlier on the thread - won' t it just bring the inverse speculation? EUR crushes, oil, metals etc. How BRIC and other commodity producers will like it? How will they react? That' s a $100 questio
"Since more home price drops will occur despite rate cuts, he might as well lower fuel costs." (by raising rates)- Average Joe
I think that is the new logic. Look for higher rates. Boosting domestic disposable income through a newly appreciating dollar and a commodities crash may bring far more benefits in their calculus. Also, the flight from savings due to low interest rates may be accelerating speculation and hurting banks far more than the fed is helping the banks with low rates. Maybe the fed is running out of ammo and needs to see everyday depositors return to banks instead of using up more of the Fed's balance sheet.
No way in hell. You guys have to stop talking economics and think politics. Sure he should be pushing up rates like there's no tomorrow but ain't gonna happen. This is an election year. You don't raise rates when the politicians are trying to keep their seats. Remember, Bernanke hasn't shown he owns a cajone yet.
Jawboning, that's all. They can't really raise, so they speak as sternly and vehemently as possible.
And with good reason: At $4-5/gallon gas, this country is grinding to a halt. Don't kid yourselves that these prices merely hurt. Even if fuel prices freeze at this level, it's all over.
We're like the ocean liner that coasts for another eight miles after its engines stop.
BB and Paulson and GWB are f*ing desperate. All this bad, bad talk, and they've barely managed to drive down the price of oil about $4.00.
A strong dollar isn't just a function of interest rates; it also requires economic strength. Raising rates is akin to stabbing an already sick patient in the gut. If the dollar popped at all it would be extremely short-lived.
Yes, the FFR follows the market, and yes, the market's calling for higher rates. I expect the latter to change as more SHTF.
We don't need to drive down the price. Did you guys read Krauthammer's article on $4 gas. It's a classic. The market accomplished what years of ineffective government micromanagement failed to do. Here's a link that goes to my blog that will take you to the article. Sorry I have to give you this roundabout way of getting there. METROPOLITAN | Property Management & Real Estate Investments
So instead of giving us stimulus crack, the government should have mailed us seeds for corn, soybeans, etc. and then have created an easy way for us to sell on the market. While the increased supply would lower the market prices, there should still be some gain with the current record prices on commodities. The agricultural exports would have increased the dollar, saved the lives of hundreds of thousands people in world, and bought some respect from the international community.
But that would mean we would have work and not get stimulus crack.
He's right. If we're ever going to wean this country off our dangerous dependence on oil we absolutely need expensive gas. People simply won't change until forced to do so. Same goes for development of alternatives -- as they say, "necessity is the mother of invention."
I must say, though... watching gas go up 12 cents daily is something else.
Put me down in the "no raise" camp. This is BB lip service as I stated in last weekend's post regarding BB's comments. It's a shot across the bow of the inflation boat. BB tightening in the face of a deteriorating economy? What about BB's well-established philosophies leads anyone to believe he is going to be a hawk with such a backdrop? Please do tell...
He will not increase interest rates. he is jawboning the oil market because the oil prices are killing the economy. In 2007, he was talking tough about increasing interest rates and then promptly cut them.
"tbgpalisades writes:
OK - I had an energy fund until a few weeks ago (I sold).
Therefore, the rally in energy prices has been very, very good over the past couple of years.
I travel to Europe regularly.
Therefore, the weak dollar hurts.
I do not own a home here in CA.
Therefore, the continuing decline in housing costs is very, very positive.
So, what am I doing wrong?"
You're not doing anything wrong but we'll all get hurt in this economy. For those of us living in eurozone but getting paid in dollars - remember the euro was introduced at $1 = 1.17 euros. Our currency has been devalued relentlessly since (CNBC keeps reminding me its great for exports - I wonder how much we could export if $1 = zero?) and now we're being hit with runaway inflation (CNBC keeps reminding me if you strip out energy and food, the two key components driving inflation - inflation is low!) So we now have the worst of both worlds; a worthless currency and soon-to-be galloping inflation. 20% interest a year on a worthless currency will only get you 20% more of a worthless currency regardless of where we live.
One comment here stands out. Sadly, the author didn't take credit.
"I think one should be careful reading too much into a short term move in expectations, especially during turbulent times. They can reverse just as quickly."
This is exactly right. Even these markets are no sufficiently liquid to avoid overshoot. When positions adjust quickly, prices and expectations may not align. It is thus probably not accurate to asser "this is what the markets expect." (In fact, markets are mere abstractions and can never "expect" anything. Only sentient beings expect.) It is more accurate to say that markets have priced in odds of some event, probably in every case, but certainly in this case.
"Consider, perhaps, that the real economy is sliding into a recession precisely because the pieces of paper that make up the various instruments in our financial are losing their relationship to reality...
It seems to me like everybody is screaming that we need to pull back on the stick extra hard even though it's becoming more and more apparent that the real problem is the control wiring is burnt out and the instrument panel is giving false readings."
So much truth, I just want to spend the morning pasting this all over teh internetz.
The fact that Paulson, Bush, and Bubbles Ben hit the networks in unison, practically simultaneously, leads me to believe that this is just more "positioning" and "jawboning" to buy time.
Bubbles' memoirs, like Greenspan's, will tell of the political pressure he came under in the summer of 2008 to reduce inflation expectations and the price of oil by talking about higher rates.
A few people have mentioned the Fed won't raise if it's an election year.
On the contrary the Fed may well raise in an election year if it looks probable that a different party will get the Presidency. This way the difficulties get blamed on the previous incumbent and not on the incoming President (and also makes the new President more likely to be elected). So the new President is grateful.
At a 2.5% FF rate (2 hikes), there would be even less demand for funds from the system. The Fed would likely have to WITHDRAW funds to keep Fed Funds from declining below the 2.5% target. This means the monetary base would SHRINK.
Unless the Federal Reserve gets the go-ahead to start paying interest on bank reserves prior to 2011.
If that happens, the monetary base could be detached from the FFR. It would give the Federal Reserve almost complete and immediate control over the overall money supply (something they lost when Greenspan allowed banks to work around reserve requirements).
If they set the interest rates on reserves separately from the FFR they would also be able to funnel money directly from the Treasury to healthy banks (those with excess deposits).
The inflationary presure will be so strong my the end of summer that the Fed will have to begin raising interest rates. But, they will try to talk up the dollar much more than their actions will actually help. They will probably raise interest rates by .25 percent, but would need to match inflation to actaully stop the dollar from continuing to weaken.
Finally I begin to think there will be some bargains in the stock market before too long. Another couple months of double speak from the Fed should do it.
Vote on the poll here... FeedTheBull | Financial and Stock Market News with a Voice we are all curious about when the Feds will raise rates. Some are saying as late as next spring...others are worried that it has to happen now before our dollar is worthless.
Frist?
Just inked a 30 year at 5.5%, so let 'er rip.
Maybe the market is forcing the Fed to raise rates?
If which is worse, a depression where the dollar has some value or a depression where the dollar has no value?
With debt/GDP at the highest in history, we are going to have to restructure this debt one way or the other.
The consumer is in real trouble with high fuel prices eroding spendable income. Higher rates have to hurt unless this does cause the dollar to rally enough to lower oil prices. Seems like a long shot.
With increasing unemployment and no wage inflation, I expect the Fed to stay put or even to decrease further.
Will the Fed Raise Rates in August?
Within the realm of past actions, a rate hike is possible, but extremely unlikely. They'll be cutting the FF to 1% by year's end.
I think this is just chest thumping by the Fed. My guess is they don't start raising rates until after Christmas and the New Year. Which just reminded me, I wonder how nasty Christmas retail sales are going to turn out...?
Is this a joke? A rate hike? BB and co. will lower rates before Sept.
These guys are pathetic. Two new books 'Greenspan's Bubbles' by Bill Fleckenstein and Charlie Morris' 'The Trillion Dollar Meltdown' are truely accurate. Read them and you WILL weep.
Maybe the Fed is starting to look at a tad more realistic measure of inflation - see Bill Gross' latest Investment Outlook.
PIMCO - IO June 2008
Maybe this new measure also takes into account things like food and energy which already seem out of control.
Who knows, maybe, just maybe if the Fed is willing to admit that SOME bubbles should be popped, then perhaps they are also ready to admit that current monetary policy is based on the wrong inflation index...
With Trichet talking rate hike, the Fed will have to match if they don't want the dollar destroyed and have inflation explode.
I think one should be careful reading too much into a short term move in expectations, especially during turbulent times. They can reverse just as quickly.
A dangerous game being played by Benny and the Feds... they are trying to control inflation expectation by talking tough, and the market is grudgingly giving them the benefit of the doubt. If they don't raise rates, it diminishes the value of their empty rhetoric for future "inflation expectation" management, and basically encourages the market to find their own metric for inflation expectations. If they do raise rates, they risk getting crucified for prolonging and deepening the recession, and a market backlash which will force another reduction by year-end.
Boy, I wouldn't want to be in Benny's position when he's eventually hauled in front of Congress and asked how he could have f-ed this up so badly...
They may just be trying to prick the commodities bubble. Interesting that the market is taking the tough talk seriously, though.
"Who Will Feel The Downgrades Of MBIA And Ambac, And By How Much"
Money Market Funds
In our view, the deterioration of the creditworthiness and the resulting downgrades of MBIA and Ambac should not require money-market funds to reduce exposure to tax-exempt or taxable municipal securities backed by these entities
http://www2.standardandpoors.com/portal/site/sp/en/us/page.article/3,1,1,0,1204836909388.html
It's easy. BB just has to wait for another bank to fail (LEH?), and then he can excuse another rate cut as an unforeseen measure. Then they can save face.
Ross, Peter T, etc.
A rate hike is not only possible it is becoming probable. The Fed is impotent and only controls a meager 19% of global money supply. This is a dramatic change from just a few years ago. They don't set rates, the market does. And to the extent that the Fed is able to convince everyone that they are in charge and actually do set rates, well...that is a testament to their persistent powers of deception.
[mildly OT]
Anybody know whether Obama and/or McCain have said (or implied) whether they would re-appoint Bernanke?
BB can't raise rates for one simple reason - it would destroy the price of oil, and along with it what is left of the GS and MS balance sheets.
"A rate hike is not only possible it is becoming probable. The Fed is impotent and only controls a meager 19% of global money supply. This is a dramatic change from just a few years ago. They don't set rates, the market does. And to the extent that the Fed is able to convince everyone that they are in charge and actually do set rates, well..."
An interesting idea. But how does it work? What unbending pressure does the Fed bow to in this case, and who is it coming from?
Mortgage rates are going up with Jumbos over 7.1%. The market is expecting an increase, however, I just don't believe it.
Its an election year...no way!
higher rates help my poor savings account
CR - can we get a poll on this??
higher rates help my poor savings account
savings are for sucker's. Producers are what count. Now , back to work....Slave
Raising rates with unemployment rising, and the economic risks to the downside, seems very unusual - but that is what the market expects.
Is a 25 bps rate hike really a 25 bps rate hike if it knocks the 10-year rate down 50 bps?
What if it's just for a week to shake up the markets a little bit?
I think the Fed could have solved so many problems with a temporary surprise hike months ago.
Guess that violates the Prime Directive.
Unfortunately, the Fed. has learned it is more better to climb a tree and tell a lie than stand on the ground and tell the truth. Expect nothing and you will not be dissapointed.
Just inked a 30 year at 5.5%, so let 'er rip.
Its probably best for borrowers that BB leaves short term rates low, as its done wonders for accelerating inflation.
IMHO, no way BB raises rates. This guy is not an inflation hawk, and he's the same guy that cut rates 75bps in the spring when he saw Dow futures down 500.
They are just trying to manage inflation expectations by talking tough.
If they really fired a 25 hike its just for show to try and head off an unmooring of long term inflation expectations. They would fire it off in hopes that the threat of more would manage things. Lots of talk, little action.
Makes you wonder how bad the May CPI is going to be.
I think raising rates is possible if Bernanke thinks it will burst the commodities bubble.
Lowering rates only works if it spurs borrowing to buy homes and thereby prevents the collapse of home prices.
Well now the home prices have already collapsed....rate cuts didn't work.
Since more home price drops will occur despite rate cuts, he might as well lower fuel costs.
Bernanke was the one who suggested checks in the mail to the consumer. Preventing fuel hikes, or even getting the prices lower may do more than rates could.
Rate cuts were to save the financials...now that they have found other ways to do that, they can now concentrate on saving the consumer.
Perhaps the spike in inflation expectations is related. This Fed likes to go on and on about making sure inflation expectations are "well-anchored".
With oil at $130, I'm thinking it's "anchors aweigh!"
If which is worse, a depression where the dollar has some value or a depression where the dollar has no value?
Oh, worrying about our well being completely misses the point.
What's important is that the Fed would lose it's most powerful tool in a deflationary environment.
They would become almost irrelevant.
And that's the one thing that can't be allowed to happen.
Who cares what happens to Germany after the war? Send all the soldiers to their deaths and let the Russians pound all the buildings into rubble.
Ross - good book recommendations - I read them both.
Bob Dobbs, that is a lengthy discussion but I'll give you the quick summary. As the US economy slows, the FCB's have been printing like mad to make up the difference and have been sterilizing by buying treasuries and agencies to the tune of $10-20B/week. All of this printing (of which the Fed hasn't been involved in directly) is causing a global hyperinflation and crack-up-boom in those foreign currencies. The blow-back effects of this can be seen in the global commodities market ($130 oil, food hoarding, etc).
Meanwhile, you have a Fed that is bent on destroying their own balance sheet by taking on L3 and other dodgy assets and exchanging for treasuries and the Treasury itself that is bent on ballooning their debt by stimulus packages and other nonsense. The Treasury is exceeding their own independent financing projections on a WEEKLY basis by many billions!
Normally, when you have an out-of-control Treasury that is continually at the trough, the logical response is for the global markets to demand higher rates to account for the risks (default, inflation, etc.) But such a response has not been forthcoming due to endless dollar-recycling and phony demand by the FCB's which acts as a lid on interest rates (see above.)
Put it all together and you can see that this is an unstable arrangement and the FCB's will say "NO MAS!" at some point. Whether the barbarians will be storming the palace gates at that point is really up to them.
So the unbending pressure is not that the FCB's wouldn't want to see this ill-conceived currency regime continue, but that the hyperinflation blow-back is causing social unrest and chaos in those countries and the only solution is for them to take a pass on more worthless US paper and stop the recycling operations. One by one the FCB's will take a pass.
Once the FCB's discontinue the recycling, the bond market (and GSE's) collapse and interest rates skyrocket. The Fed will try to manage this re-balancing process by giving the illusion that the recession is behind us and that inflation is the primary concern (hawkish jaw-boning) but the reality is that the global market will make the decision on when rates rise and how much.
Makes you wonder how bad the May CPI is going to be.
I'm sure a decrease in women's apparel will balance everything. BTW: Women's apparel is weighted about 5X for men.
I wouldn't be surprised one bit if they raised rates later this summer... Heck I wouldn't be surprised if they did it TOMORROW!
The question you have to ask is 'are they confident they have made sufficient liquidity available?' and 'do they think the immediate crisis is behind us?' Considering all the windows they have open I'd guess the answer is 'yes - they think it is under control'. If so then pull the trigger whenever.
And a quarter point or even a half point - quick, out of the blue - might be enough to put fear in the risk-loves without completely killing off the sickly banks.
It might also send a message to banks using the liquidity to play speculate instead of clean up, reinforcing BB's recent theme: "if you banks need recapitalization, you better get it done NOW while you still can". Else these guys really will be permanent fixtures at the window in between their rolls at the craps table.
It really depends on what the fed govs objectives were for the cuts in the first place (not what they said in the minutes but real intentions IF they had them). If it was only for liquidity as they said then are we now liquid enough?
Would I bet they raise tomorrow? No chance! Would I be surprised if they did? Not really - the environment is way too weird to be surprised by anything they do right now.
CR: Can we get the full article text in the Feedburner feeds, pretty please
dryfly --
If it was only for liquidity as they said then are we now liquid enough?
Can you find any quote from any Fed communication saying the rate cuts were for liquidity?
I thought they were pretty consistent in separating the goals and the mechanisms... Rate cuts are to "promote moderate economic growth over time", while the new tools (TAF/TSLF/PDCF/XYZPDQ) are to provide liquidity. To my knowledge, the Fed has remained fairly on-message about this distinction.
I don't understand all the complicated reasons, but looking at it as a layman: Let's say the Fed's goal is to avoid or limit the effects of recession/depression. If the Fed lowers rates to stimulate borrowing, that also lowers the US dollar and consumers feel the gas pinch and cut back on spending, causing a downward economic spiral. If instead the Fed raises rates, that raises the cost of borrowing, again causing the downward economic spiral.
Bascially, Bernake has to somehow balance on a razor's edge between the two. Assuming there is an edge, it's hard to tell...
Interest rate manipulations never have and never will control inflation. The only way to have a stable currency is to peg it to gold.
What are you people talking about? Take a step back and think...the enormous debt is best serviced with depreciating $$. It's the least painful option. When the smoke evaporates, rates will be coming down. BB has NB (no balls). Here's a unique opportunity to short the US$ in the near term.
This preemptive jaw boning to see i they can keep the dollar from crashing.
If this doesn't work they will have to raise rates or commodities, including oil, will take another large leg up putting a stake through the heart of any recovery while precipitating a price panic that will send the world economy into a downward spiral.
I'm choosing the "raise rates and pop the commodity bubble" side of the razor as a preference.
The panic in the public over higher food and gas costs is getting palpable and it's creeping me out.
Plus, perhaps higher costs for borrowing would actually encourage some lenders to start lending again. Lots of risk in lending low at this time- as if we don't already know that.
I thought they were pretty consistent in separating the goals and the mechanisms... Rate cuts are to "promote moderate economic growth over time", while the new tools (TAF/TSLF/PDCF/XYZPDQ) are to provide liquidity. To my knowledge, the Fed has remained fairly on-message about this distinction.
Nemo | Homepage | 06.10.08 - 7:39 pm | #
Then probably all the more reason they think they could start inching rates up.
I mean 2% is a pretty damned low rate historically speaking and while the economy isn't perfect it isn't a complete mess... except for that little problem with liquidity which the windows are addressing very nicely as you point out...
And since it takes time for the cuts/hikes effect to be felt (say 6-9 months yes/no?)... then what's holding them back now?
Unless they know or believe more than is in the message.
If they do not raise rates the market will end up calling their bullshit and the Fed will be worse off than before.
@Darth,
I understand your points BUT the FCB's especially Euro are itching to cut rates in my opinion. Refusing to recycle dollars and causing massive interest rate increases here would give them the 'cover'. But the FED is as you know impotent. Typically they follow markets.
I'm in my fifth decade in this business and I'll swear this is the without doubt the most bizzare situation as I've ever seen. Finance during WWII was eccentric but at least we had a common enemy. Now the enemy are...who?
There's a simple reason the Fed cannot engage in a rate hike campaign. It has to do with the little-understood way in which the Fed injects liquidity.
At a 2% Fed Funds rate, the monetary base is stagnant. There is no net demand for funds from the banking system.
At a 2.5% FF rate (2 hikes), there would be even less demand for funds from the system. The Fed would likely have to WITHDRAW funds to keep Fed Funds from declining below the 2.5% target. This means the monetary base would SHRINK.
So, the market proposes that the Fed set a rate at which the monetary base would shrink while the banking system remains fragile and consumers desperately need access to credit. This is highly unlikely to occur. Why? Because it is the very thing that Ben Bernanke criticized the 1930's Fed for doing. In fact Bernanke made his academic career through that critique.
soon as the jobless claims pops to >400k, all the talk of a hike will be a distant memory.
any given thursday.
yep i believe they will raise
Strange things afoot in the bond market. A FFR increase might invert the yield curve.
I can't actually figure out with any certainty WTF is going on right now. But I suspect by August, the wheels are gonna start falling off.
Cheers,
Congress should hold an enquiry into Fed fund future contract manipulation!
I'm in my fifth decade in this business and I'll swear this is the without doubt the most bizzare situation as I've ever seen. Finance during WWII was eccentric but at least we had a common enemy. Now the enemy are...who?
Ross | Homepage | 06.10.08 - 7:55 pm | #
Pogo knows!
Gotta keep that yield curve steep.
The Fed Reserve exists to insure the survival of the banking system...not the peons. There is no banking system without a non-inverted/flat yield curve(when you're entire business model is dependant on borrowing short and lending long). Period!
No hikes while Helo-Ben and co. are running the show. Not-gonna-happen.
David Pearson,
M1 shrank in April, so what's 25bp going to do to make things worse.
Kp,
Good point.
I'm fairly ambivalent right now on this topic. My guess is that B.S. Bernutty lets it rip. Spew tough talk and do nothing seems his M.O. on inflation.
However, things are so freaking strange right now...who knows.
Cheers,
What the fed does is mostly irrelevant at this point. But, having talked tough on inflation and the dollar, if the Fed don't follow it up with actions, people will chase the governors with pitchforks in hand.
Isn't this the same Fed that said Subprime was contained last summer and everything was going to be alright? I can't believe that the market still gives these yahoos any credibility.
Ben and stooges are all wimps and would not dare to raise rates before an election or even after.
Fool me once shame on you fool me twice shame on me....
peAkcredit writes:
(CNBC) "The Federal Reserve hopes tough talk on inflation will do the job of moderating price increases."
All members of the "Inflate-Or-Die" Secret Society (mostly gov't employees) know that given enough time to talk inflation, otherwise intelligent citizens can be persuaded to:
1)Fill the car gas tanks before gas hits $5.
2)Buy a 40 pound sack of rice before CostCo runs out.
3)Get that money of out savings and buy stuff now before their dollars buy less.
4)Stop saving for next year's new car and buy it now before the payments get too high.
5)Consider making an offer on that house they've been looking at, before mortgage rates get too high.
Society members know that Japan tried this unsuccessfully for 17 years but failed to provide the rising prices and increasing interest rates that are required to initiate citizen involvement, sabotaging their effort with the very misguided ZIRP policy, thought necessary to flush money out of savings. Members are thoroughly trained to give as much time to talking up higher interest rates as to talking higher prices.
Members who attain the highest levels of achievement, such as being appointed to the Federal Reserve Board, receive the coveted lifetime "Hawk Talk" award at a secret ceremony.
Whenever it arises, Society members are taught to thoroughly debunk phrases such as "THE ONLY THING WORSE THAN INFLATION IS TALKING ABOUT IT!", or "INFLATION IS LIKE PREGNANCY - IT'S HARD TO HAVE A LITTLE OF IT".
peAkcredit | 06.10.08 - 7:56 pm | #
"there would be even less demand for funds from the system."..."This means the monetary base would SHRINK."
$270B sloshing including the TAFs is very healthy demand. The Fed keeps dumping more money in to support the base. At $50B in the last month, the Fed has to be getting nervous. The growing elephant is the solvency issue. It seems many are ignoring this continuing consumption of the Fed's balance sheet. Countrywide is offering 3.75 - 3.9%. 2.25% is far more attractive. It will be interesting to see if the Fed drops their collateral requirements.
Bernanke is a lying bastard and the markets know it!
Bernanke won't raise rates. He won't do the right thing. He's a college professor. (You know the famous quote: they're all pointy-headed intellectuals who don't even know how to park a bicycle straight.) Bernanke received a Ph.D. for his work, so he thinks he's right.
The entire Ivy-league academic world operates on the principle of endless inflation. They charge more every year, with no resistance or repercussions, since government programs and donors inflate the budgets. Since the mid-1970s, inflation overall has increased 200% while Academia has raised its prices 500%.
I don't buy the argument that the Fed didn't realize TAF and lower rates wouldn't spike the commodities market. I expect they counted on it - to stoke inflation fears as they headed for ZIRP, prevent more widespread deflation, and mostly to allow the IBs to recapitalize.
Good point, I'm waiting for college education to deflate just like everything else that was built on easy credit. But so far, no luck.
Somewhat n00b question:
What is the main reason that preventing the Fed from raising rates? As it's been pointed out, the windows are providing the liquidity for the IB's to clean up their books. Is the Fed really still trying to stimulate the economy? Other than necessities, no one I know is buying anything. Either we're broke, minimalists, content, or prepping for armageddon.
Ain't gonna happen, more cuts and TAF crap coming down the pipe.
25bps seems immaterial when these folks are raising capital at far higher rates. They'll be rolling the TAF just the same and demanding more.
Allen C,
Potential yield curve inversion is the boogeyman methinks.
I'm probably wrong...in this environment. But keep an eye on it is my advise.
Cheers,
Maybe the Fed is going to turn over a new leaf and get tough on inflation. We've all been kvetching about it here for a long time. Maybe the Fed has come around to our way of thinking. They need to prove it by following through with at least one rate hike in the next couple months.
The Fed does not yet know. They will not make decisions until they meet and discuss them. Talk now by Bernanke is worth only one thing: it may influence expectations, therefore actions. If the US clearly slides into recession, the Fed simply cannot raise rates. Barnanke's talk aside, nothing fundamental has improved in the last four weeks.
Merrill CEO wants ongoing Fed access, rules reform
I'm impressed by the sheer gall of expecting loans from the Fed for B/Ds, but..."please, don't trouble us with all that oversight rubbish you impose on member banks."
(CNBC) "The Federal Reserve hopes tough talk on inflation will do the job of moderating price increases."
Since CNBC is ALWAYS WRONG on pretty much EVERYTHING, it's more likely that the Fed actually believes what it's saying and is seriously considering raising rates because they think that's what the markets need . . . . . . . fools they are.
PeteInPa --
Merrill CEO wants ongoing Fed access, rules reform
Is it me, or does Thain bear a striking resemblance to Stephen Colbert?
"You can't take rules created for one type of financial institution and apply them to another. There have to be rules appropriate for the type of business," he said.
No, of course not, wouldn't think of it. But I do wish he would elaborate. For example, if your business is the type that buys dodgy loans, rolls them into "AAA" rated securities, and then sells those on to pension funds... then what kind of rules would be appropriate before letting you tap the central bank's balance sheet?
Just curious.
Nemo-
Yeah, to be fair, I'd say those two sentences of his argument are perfectly legit.
However...if you want to play, you have to pay.
Also, past experience with CEO "too much regulations" arguments makes me picture him as Wimpy from Popeye saying; "I'll gladly pay you Tuesday for some bailout cash, today!"
speaking of inflation...
i just rented a car from Avis in San Francisco. the clerk was printing the reciept and took a double look at his computer. then he turned to the wall behind him and raised the Avis gas rate to $4.39 a gallon. He turned to me and said that was the third time TODAY he had to do that (upon instructions from his computer). He started the day at $4.17.
Other than the discount rate, the FED does NOT control rates. It sets a targeted rate. That's all. But right now, the market is leading the Fed, already higher than the Fed's current target. All this talk about is the Fed going to raise rates is ridiculous. Sometimes the Fed properly leads the market, controlling through SOMA operations, other times, as now, the market leads it.
Inflation may be real but so is the profit from my financials shorts and I do not believe that they are done going down. Write offs and much pain lie ahead, in the U.S., UK, even Canada which has heretofore been relatively unscathed.
They are jawboning and nothing else. A temporary halt to the greenback slide.
Aided and abetted, a bit, by Mark Carney, governor of the Bank of Canada, today. Situation on this side of the border is somewhat different.
The Fed won't raise rates for another couple of years. Demand destruction of commodities is on it's way.
However, the shock of this price rise has resonated and habits are changing. The USA and the world better prepare for deflation.
OK - I had an energy fund until a few weeks ago (I sold).
Therefore, the rally in energy prices has been very, very good over the past couple of years.
I travel to Europe regularly.
Therefore, the weak dollar hurts.
I do not own a home here in CA.
Therefore, the continuing decline in housing costs is very, very positive.
So, what am I doing wrong?
My guess: no rate hike unless the dollar re-visits low vs Yen (97 or 98--- seems like ancient history).
I'm looking for a surprise rate hike on op ex.
The Fed--Bernanke in particular--made a huge mistake in not opposing the absurd and damaging tax rebates. I think Bernanke went along with it because he had no political captial, after being so far behind the curve on the housing bust. Who knows? Maybe he actually believes in Keynesian fiscal policies. But the tax rebates will help China more than the US: the US borrows money from China, sends out checks to Americans, who buy goods made in China. We keep the retail commissions!
So raising rates is bad because it raises the cost of borrowing, thereby hurting the economy. But keeping rates low is also bad because it fuels inflation, undermines the dollar and thereby makes oil and other important things too expensive, which hurts the economy.
Maybe this economy is just sick, and neither of the two medicines available to the Fed is the right cure.
Maybe this is what Dr. Roubini and others were trying to tell us: It's a solvency crisis, not a liquidity crisis.
It's important to keep in mind that rising prices aren't necessarily inflation, any more than falling prices (e.g., those of electronic gear) are necessarily deflation. Inflation is prices rising due to the money supply expanding more rapidly than the quantity of goods and services available to be bought. Price rises due to increased competition for scarce resources are not inflation. In a truly inflationary environment, wages rise along with prices.
Since the failure of wages to rise along with prices is exactly what most people are complaining about, we have a fairly good indication right there that we aren't in a severely inflationary environment.
I can clearly remember back when I was fifteen years old -- forty-five years ago -- thinking that since essentially all Americans are descended from fairly recent immigrants, who probably weren't all that much more able than others in the nations from which they came, the major factors making the US so much wealthier than those nations were probably its less-depleted natural resources and its having escaped devastation in WWII, and that my fellow Americans were living in a fool's paradise by taking our superiority and standard of living for granted, with a sense even of entitlement. Someday, I was sure, we would find ourselves competing on equal terms with a recovered Europe and Asia for markets and resources.
Those days have come. And we've not prepared for them.
But the tax rebates will help China more than the US: the US borrows money from China, sends out checks to Americans, who buy goods made in China. We keep the retail commissions!
And we pay the interest. During an earlier Republican debate, Mike Huckabee (of all people) made that point, opposing the stimulus: I think his language was, "just make the check out to china and save postage"
Nemo writes:
They may just be trying to prick the commodities bubble. Interesting that the market is taking the tough talk seriously, though.
Nemo | Homepage | 06.10.08 - 6:54 pm | #
Remember, this is the same market that believes the headline CPI is true, believes unemployment really is 5.50%, and that the housing market has bottomed.
This was the same Fed that said subprime was contained, the economy would grow moderately, and that inflation was well anchored.
Bernanke, a student of the Great Depression, said that Fed made the mistake of raising rates back then. I can't imagine him doing that with unemployment rising and the economy rapidly going over the cliff.
I say no way he's raising rates, but yet the market won't call his bluff. It amazes me the market trusts anything the Fed says, but then again, look at all the wizards at Lehman, Bear, CountryWide, Wamu, etc. He's their bitch, the next move is a rate cut, which will be a 'surprise' and good for a 400 point rally.
Actually it's ridiculous to frame this question as "Will the Fed raise or lower rates" because the Fed clearly follows the short end of the market, as many others have pointed out. So the question needs to be "When will the short end tank again?" and I say before August, and definitely below 1% by year's end.
For the past year I've believed we would have both inflation and deflation rather than one or the other, and whichever one second would be worse and longer lasting.
As far as the Fed not being able to raise rates, they can and they should. This is the like the BOE's failed ERM interest rate policy. When Soros (who gets the credit but it was Stanley Druckenmiller's idea - Soros just pushed him to do it in bigger size) shorted the pound and it broke it ushered in a terrible recession. Initially the Brits were pissed at this currency speculator causing them pain, but in the long run the economy was able to purge it's inefficiencies and become healthy.
The Fed needs to hike rates signficantly. I think they should raise them to 3.25 - probably a neutral rate. This may cause some bankruptices, but we too need to purge our inefficiencies and get on with it.
Who gives a shit about housing? Newsflash - houses don't make money. Inventing things does. We don't even have to manufacture them, but we do need to own the idea, sell it to the world and bring money back home from it.
The best thing that could happen is for housing to get crushed so badly that people forgot about making money off of houses for at least a generation.
My post may be a bit disjointed. My point was that the US gov't today is spending money defending housing (a major inefficiency) just like the BOE spent a ton of money defending a currency peg to a basket of Europe (a major efficiency).
A good inflation scare in the interest rate markets may do for us what Quantuum Funds did for England.
We need the Fed to get whipsawed.
There's no better way to fight cost-push inflation. The Fed can either target on GDP or price.
The Fed first targeted on GDP by increasing money supply to increase demand. But the subquence is that price level went up and induced further oil price hike.
The Fed now has to target on price stability by letting the GDP decrease (recession) to maintain the price level and stop the upward spiral of oil price.
The ideal way is that Fed have the credibility to fight inflation such that the market would not speculate price increase. That's why there're so much talking on strengthening the dollar now. But it seems to be a little late now.
Dang. I was hoping to see the farmland market cornered by some large hedgefunds. I guess I won't be jawboning Blackstone Cherries for $25.99/lb.
This may cause some bankruptices, but we too need to purge our inefficiencies and get on with it.
I second.
If we're going to purge and cause hurt, we need to get rid of SS and Medicare. When those programs become cash negative in a couple of years, it will hurt bad; much worse than anything now. We're already spending over 55% of the annual budget on the two entitlement programs, and 4/9 of our entire debt is owed to these trust funds. To make matters worse, the Boomers enter during a recession.
Recipe for disaster.
JM:
I agree that Americans have been living in a fool's paradise regarding our economic productivity relative to the rest of the world.
The collapse of the credit bubble is making it painfully obvious that we have become a Hollow Giant in the world economy. We are probably in the process of imploding, big-time.
And most of our economic problems are structural, and the Fed can't solve them by manipulating the Federal Funds Rate.
Price of oil will double says head of Gazprom.
An ominous warning that the rapid rise in oil prices has only just begun -
Home News, UK - The Independent
Wonder what this will do, if it happens, to the US economy and lots else.
Take a look at these figures and then factor in raising rates... Well Punk, do ya feel lucky!
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Why don't we have 200 visitors in the forum tonight?
"Price of oil will double says head of Gazprom."
What does it say that the new president of Russia was the Chairman of Gazprom? Wonder if he's still pissed that Reagan called his country the "Evil Empire." Now who's laughing.
If the US clearly slides into recession, the Fed simply cannot raise rates.
A recession is a contraction in the real economy.
Interest rates concern pieces of paper that in an ideal world have some connection with the real economy.
Consider, perhaps, that the real economy is sliding into a recession precisely because the pieces of paper that make up the various instruments in our financial are losing their relationship to reality.
If so, does it make sense to focus on those pieces of paper as a means of controlling and somehow improving the real economy?
It seems to me like everybody is screaming that we need to pull back on the stick extra hard even though it's becoming more and more apparent that the real problem is the control wiring is burnt out and the instrument panel is giving false readings.
I think this sort of financial tunnel vision is what got us the death sentence in the 1927 slowdown. We cut rates and in the end just more grossly distroted the real economy.
Will $200 oil become a self-fulfilling prophecy? The administrative assistant in my friend's office had a nervous breakdown (sobbing) today over how much it is costing her to commute -- with prices as they are now...
Always happy to see the saw about the entitlement programs brought out like a dead horse.
Never mind a trillion dollar off-budget piss in the sand box that is Iraq, never mind a military budget that is so far out of proportion it actually creates our GDP "growth", never mind tax cuts that polarize the population by increasing the wealth of the top one percent of one percent, never mind gutting the entire regulatory function of market watchdogs so crooks can run wild, never mind taking junk for treasuries which are then used to gamble on commodities and drive the middle class into poverty - nope.
Just can't have those entitlement programs. Health, education, a small retirement security after contributing all your life - can't have any thing that irresponsible.
If the point of this financial debacle is to drown those programs in a bathtub, then it's time drown the fat cats. The middle class built this country and we'll get our share as sure as the pigs and crooks walking away with million dollar bonuses. Just try screwing with those programs again - privatization anyone? The neocons and repuglicans will be thrown to the other side of the sun.
cheers...
I think for starters we could repeal the prescription drug benefit plan. That was a pissing match of "who can buy the AARP's vote" in 2004 to become President. AARP is almost as awesome as the ACLU defending child molestors "rights".
The prescription benefit drug plan accounts for 17% of future entitlement liabilities and nobody has "paid into it" so there shouldn't be much screaming about giving it up.
im with thoth
thoth wrote:
What are you people talking about? Take a step back and think...the enormous debt is best serviced with depreciating $$. It's the least painful option. When the smoke evaporates, rates will be coming down....
thoth | 06.10.08 - 7:42 pm | #
yeah the fed could kick it a quarter or two but i doubt we see 4% any time soon.
Raise rates? HAHAHAHAHAHAHAHAHAHA!!!!!
We'll see ZIRP before we see a rate increase.
Haven't you guys read Big Ben's deflation speech?
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm
This has been his playbook since last summer. HES NOT RAISING RATES!!!
The real story IMO is looming insolvency and asset price deflation spreading into a global slowdown. The oil/commodity spike was expected, but perhaps not at this intensity. They know things are really f'ed up, and they expect that when deflation goes global the commodity fire will burn itself out.
The oil spike is one chapter in a very very very long and drawn out train wreck.
By jawboning, they are attempting to manage the decline to preserve their power and allow the right players to properly position themselves. Can't have things go berserk and disorderly just yet.
Its going to be one hell of a bumpy ride.
In case of sudden rate cut as suggested by dryfly earlier on the thread - won' t it just bring the inverse speculation? EUR crushes, oil, metals etc. How BRIC and other commodity producers will like it? How will they react? That' s a $100 questio
krish, thanks for the link to the S&P article.
The Canadian and European I banks have written off 30-50% of the ABS value-protected-by-the-insurers. The U.S. I banks have written off 8-15%.
I KNEW that the Americans were better money managers than the Canucks and Europeans (sarcasm).
Yep, big writedowns ahead for ML, C, and the gang.
"Since more home price drops will occur despite rate cuts, he might as well lower fuel costs." (by raising rates)- Average Joe
I think that is the new logic. Look for higher rates. Boosting domestic disposable income through a newly appreciating dollar and a commodities crash may bring far more benefits in their calculus. Also, the flight from savings due to low interest rates may be accelerating speculation and hurting banks far more than the fed is helping the banks with low rates. Maybe the fed is running out of ammo and needs to see everyday depositors return to banks instead of using up more of the Fed's balance sheet.
No way in hell. You guys have to stop talking economics and think politics. Sure he should be pushing up rates like there's no tomorrow but ain't gonna happen. This is an election year. You don't raise rates when the politicians are trying to keep their seats. Remember, Bernanke hasn't shown he owns a cajone yet.
Jawboning, that's all. They can't really raise, so they speak as sternly and vehemently as possible.
And with good reason: At $4-5/gallon gas, this country is grinding to a halt. Don't kid yourselves that these prices merely hurt. Even if fuel prices freeze at this level, it's all over.
We're like the ocean liner that coasts for another eight miles after its engines stop.
BB and Paulson and GWB are f*ing desperate. All this bad, bad talk, and they've barely managed to drive down the price of oil about $4.00.
A strong dollar isn't just a function of interest rates; it also requires economic strength. Raising rates is akin to stabbing an already sick patient in the gut. If the dollar popped at all it would be extremely short-lived.
Yes, the FFR follows the market, and yes, the market's calling for higher rates. I expect the latter to change as more SHTF.
We don't need to drive down the price. Did you guys read Krauthammer's article on $4 gas. It's a classic. The market accomplished what years of ineffective government micromanagement failed to do. Here's a link that goes to my blog that will take you to the article. Sorry I have to give you this roundabout way of getting there. METROPOLITAN | Property Management & Real Estate Investments
unirealist,
Yeah, I also crack up over the whole "demand collapse" thing. If oil demand collapses then the economy has collapsed, too.
tj: is my logic wrong?
So instead of giving us stimulus crack, the government should have mailed us seeds for corn, soybeans, etc. and then have created an easy way for us to sell on the market. While the increased supply would lower the market prices, there should still be some gain with the current record prices on commodities. The agricultural exports would have increased the dollar, saved the lives of hundreds of thousands people in world, and bought some respect from the international community.
But that would mean we would have work and not get stimulus crack.
BigR: LOL!
Tom Lindmark,
He's right. If we're ever going to wean this country off our dangerous dependence on oil we absolutely need expensive gas. People simply won't change until forced to do so. Same goes for development of alternatives -- as they say, "necessity is the mother of invention."
I must say, though... watching gas go up 12 cents daily is something else.
Put me down in the "no raise" camp. This is BB lip service as I stated in last weekend's post regarding BB's comments. It's a shot across the bow of the inflation boat. BB tightening in the face of a deteriorating economy? What about BB's well-established philosophies leads anyone to believe he is going to be a hawk with such a backdrop? Please do tell...
Trichet will win this round and Ben may end up bankrupt.
THink what will happen if Ben DOES NOT raise rates now that the markets are pricing in such expectations.
So the futures market thinks Blackhawk Bennie's gonna raise rates ... ha ha, that's a good one; pass me another beer.
I'll believe it when O.J. finds the "real" killer.
Only one scenario i see that would enable them to raise rates.
Solve the CDS problems first and it looks like they are working on that clearing house thingy.
This gets more interesting by the minute.
He will not increase interest rates. he is jawboning the oil market because the oil prices are killing the economy. In 2007, he was talking tough about increasing interest rates and then promptly cut them.
Different year same game.
"tbgpalisades writes:
OK - I had an energy fund until a few weeks ago (I sold).
Therefore, the rally in energy prices has been very, very good over the past couple of years.
I travel to Europe regularly.
Therefore, the weak dollar hurts.
I do not own a home here in CA.
Therefore, the continuing decline in housing costs is very, very positive.
So, what am I doing wrong?"
You're not doing anything wrong but we'll all get hurt in this economy. For those of us living in eurozone but getting paid in dollars - remember the euro was introduced at $1 = 1.17 euros. Our currency has been devalued relentlessly since (CNBC keeps reminding me its great for exports - I wonder how much we could export if $1 = zero?) and now we're being hit with runaway inflation (CNBC keeps reminding me if you strip out energy and food, the two key components driving inflation - inflation is low!) So we now have the worst of both worlds; a worthless currency and soon-to-be galloping inflation. 20% interest a year on a worthless currency will only get you 20% more of a worthless currency regardless of where we live.
One comment here stands out. Sadly, the author didn't take credit.
"I think one should be careful reading too much into a short term move in expectations, especially during turbulent times. They can reverse just as quickly."
This is exactly right. Even these markets are no sufficiently liquid to avoid overshoot. When positions adjust quickly, prices and expectations may not align. It is thus probably not accurate to asser "this is what the markets expect." (In fact, markets are mere abstractions and can never "expect" anything. Only sentient beings expect.) It is more accurate to say that markets have priced in odds of some event, probably in every case, but certainly in this case.
he's thrown two right at your ear, so where's the next one likely to go?
low and away?
right, but watch out for one in your ear.
@ac
"Consider, perhaps, that the real economy is sliding into a recession precisely because the pieces of paper that make up the various instruments in our financial are losing their relationship to reality...
It seems to me like everybody is screaming that we need to pull back on the stick extra hard even though it's becoming more and more apparent that the real problem is the control wiring is burnt out and the instrument panel is giving false readings."
So much truth, I just want to spend the morning pasting this all over teh internetz.
Another reason why Ben won't hike :-
Google Videos Error
The fact that Paulson, Bush, and Bubbles Ben hit the networks in unison, practically simultaneously, leads me to believe that this is just more "positioning" and "jawboning" to buy time.
Bubbles' memoirs, like Greenspan's, will tell of the political pressure he came under in the summer of 2008 to reduce inflation expectations and the price of oil by talking about higher rates.
A few people have mentioned the Fed won't raise if it's an election year.
On the contrary the Fed may well raise in an election year if it looks probable that a different party will get the Presidency. This way the difficulties get blamed on the previous incumbent and not on the incoming President (and also makes the new President more likely to be elected). So the new President is grateful.
At a 2.5% FF rate (2 hikes), there would be even less demand for funds from the system. The Fed would likely have to WITHDRAW funds to keep Fed Funds from declining below the 2.5% target. This means the monetary base would SHRINK.
Unless the Federal Reserve gets the go-ahead to start paying interest on bank reserves prior to 2011.
If that happens, the monetary base could be detached from the FFR. It would give the Federal Reserve almost complete and immediate control over the overall money supply (something they lost when Greenspan allowed banks to work around reserve requirements).
If they set the interest rates on reserves separately from the FFR they would also be able to funnel money directly from the Treasury to healthy banks (those with excess deposits).
I'm not sure if that makes it a good idea or not.
The inflationary presure will be so strong my the end of summer that the Fed will have to begin raising interest rates. But, they will try to talk up the dollar much more than their actions will actually help. They will probably raise interest rates by .25 percent, but would need to match inflation to actaully stop the dollar from continuing to weaken.
Finally I begin to think there will be some bargains in the stock market before too long. Another couple months of double speak from the Fed should do it.
Vote on the poll here... FeedTheBull | Financial and Stock Market News with a Voice we are all curious about when the Feds will raise rates. Some are saying as late as next spring...others are worried that it has to happen now before our dollar is worthless.