BB and Co. are going to make the same mistake Greenspan and Co. did. Rates are not going higher any time soon. Inflation will get out of control and the Fed will be caught chasing another bubble. Welcome to America -- the bubble factory of the world.
Starting in Q3 2010, barring any further economic deterioration, IMHO... As to the bubble creation, it's not necessarily the same thing. There's a view that monetary policy can't, by itself, address bubbles, so if they introduce another entity to regulate leverage, they might be able to avert the Greenspan issues. I remain skeptical, though, as the incentives look all wrong.
BB said today that the Fed "may" need to tighten policy to prevent inflation. This will likely trigger new waves of debt defaults, similar to the subprime triggering. My guess is a slight commencement in tightening 1/2 way through 2009.
As soon as they start raising the fed fund's rate, contrary to recent history, I expect the equity markets to take off, as it will signal some sort of confidence that things are improving.
Ben probably thinks he has to be "good" (Obama version) until February, so he can retain his position to provide enlightened guidance at the Fed. Bet "O" will knife him and bring in another, greater inflationist, so all long term promises are meaningless.
I think the current estimates are all wrong. The inflation game is a psychological war, not a boots-on-the-ground kind of war. Remember what happened a few months ago when rates were headed up in spite of "quantitative easing?" That was the bond market flipping Ben the bird. They were saying 'you don't have the cajones to tighten up before the flood of liquidity becomes an inflation tsunami.' Then what does the fed do? They start shutting down liquidity programs. The market starts to believe that maybe Ben has at least one cajone and rates go back down. It's like training a puppy. A firm hand early on means fewer problems down the road. But that means a 'firm hand', not a beat down. As long as the market believes that the fed is on the job, the excess liquidity by itself won't be an issue. Not immediately. The fed has a small window in which they can maneuver enough to show they are serious without affecting rates and stifling the recovery. The key to this strategy working though is to start that maneuvering long before inflation is even a glimmer in the market's eye.
True, but these dynamics ain't exactly rocket science. Given your analysis above, care to estimate the timing of the hike(s)?