Bernanke could slam the door on inflation with a firm 50 basis point hike tomorrow, but he doesn't have the balls or brains. What's better? Increasing inflation over and above what we're already experiencing, while the banks refuse to lend money except for all but the most exceptional cases... ...or decreasing inflation (deflation on core), while the banks refuse to lend money except for all but the most exceptional cases? At least with the latter, consumers get breathing room to spend more money on things other than gasoline, heating oil, electricity and bread. Not only that, but he might be able to break the neck of this core inflation with one simple hike, because it would catch the factors responsible for the inflation off guard. If successful, he could then relax monetary policy in maybe September, because he will have created a cushion. But he won't.
And what happens if this doesn't crack oil? (which it wouldn't) The reality is that a rate hike here would kill financials (not allowing them to replenish profits from a steepened curve), furthering the commodity bulls' argument that stocks + bonds are no good to buy still, and contribute to more oil buying. Money supply is down. Don't believe shadowstats. This oil bubble is simply a hot money trade. It'll continue until people believe there's no more profit to be had on the upside. And no market participant out there thinks Bernanke would even continue hiking rates in the face of the current pressures banks are up against. Also: If oil collapses here, short rates up might also flatten the curve again, forcing down long rates. It will accentuate the banks' cash flow problems. Fed will hold and talk hawkish.
I agree completely. I would add that a lot of the money in oil right now is also SCARED money, probably people that got chased out of their positions in asset backed securities after the mortgage market unraveled. I think its important that the Fed starts ratcheting up the inflation talk, but fed funds futures pricing in a September 25 bp cut seems reasonable to me. My question is, will the dollar tank if they don't hike the rates tomorrow? Trichet has basically outright said the ECB is going to raise their rate at the next meeting, so that would make the spread between the euro and the dollar even bigger... :eek:
I think you are too hopeful. It's going to take a Volker-like move and then resolve to stop the excessive money pump. Not a chance in Hell, sadly.
Risk of Inflation BAD FOR STOCKS. Risk of rising rates BAD FOR STOCKS. TO do the right thing requires some one to suffer some pain, so delay is FED aim. Dow to 10,000 PPT cant buy every stock ! Or ..more and more Govt Checks ! What about that $300Bn housing bill, can I have some ?
From day one this Fed has been putting out fire with gasoline. The same ET inflation doves as always are urging further accommodation. What price was oil and other commodities when these rate cuts began? Where were C, BAC, GE and GM? What was the unemployment rate? LIBOR? The Dollar index? Have lower rates helped? An iota? Of course not. If merely opening the window under any and all circumstances was a magic elixir then you'd never raise rates. I'm simply amazed how anyone who has studied or observed the follies of the U.K.'s Heath government in the early 1970's or the Burns Fed of the mid to late 70's could think this will end without systematic inflationary pressure. The Fed misstepped because they made several wrong assumptions. Their biggest mistake was the ridiculously naive notion that credit markets were suffering from liquidity issues rather than a revaluation cycle based on declining prices of assets collateralizing those troubled debt securities. Within two years the Long Bond will yield 10%. Bank's will enjoy a steep curve. And fail by the dozen. Funny but it was nothing other than leveraged curve trading that caused much of this debacle. Treasuries are to-morrows CDO's.
+1 I wonder who it is that will have to man up and do the right thing. Bernanke will just try to pass the buck off on someone else. Very, very sad.
Everyone talks about Fed monetary policy. What about the government fiscal policy. Look at banks, there's no inflation, they're sucking wind trying to stay alive. But look at the government, handing out billions. A farming bill here, a stimulus package there, and now a housing bailout. Those billions aren't coming from government savings. They're being borrowed, the US has a huge current account deficit, there's no reserve. That money is being borrowed from other countries, and being given to US businesses and Citizens. So the ones whom the government borrows from demand more for their dollars as that money dilutes the economy. Thus, the fed has to print more money out of thin air as a consequence. But the cause isn't the fed printing, it's the government spending.