Ok, so I am not the most savy person when it comes to forcasting interest rates. I thought for sure the subprime mess would bring on higher (much higher) interest rates. But the opposite is happening. There is stronger talk of the Fed cutting soon. The weak dollar.... higher inflation.... lack of liquidity.... I thought they would spell higher rates. The 30 year bond should be over 7% by now. What is keeping the rates so low for so long? Are they going to just "pop" one day and everyone will wake up and realize those fake CPI numbers are massaged to look good? What am I missing here?
Euro (against the dollar) looks like its crapped out since the liquidity injections by the central banks around the world. 1.38 to 1.3398 in such a nice waterfall action over the past week. Me thinks this is more a reflection in confidence of the dollar vs the Euro in crisis situations going on now. Anything dramatic going on tradewise to create such a waterfall? If this subprime mess were to exacerbate or continue on, then I think we hit bottom in the dollar. Core inflation peaked last September at 2.9%. Yesterday's reading came in at 2.2%. The PCE is what the Fed looks at and that bugger last came in at 1.9% which is trending down over the past year. They got room for small incremental cuts.
The downward trajectory in US Treasuries is almost exclusively due to flight to quality buying. It has nothing to do with economic fundamentals. This is purely a demand move specific to US sovereign debt. If you look at corporate debt, the story is very different. Spreads in corporates to Treasuries have been rapidly expanding.
It's not the fed's job to move rates to reflect some "reality". Interest rates is a monetary policy instrument. In this case, raising rates is not necessary to curb cheap housing loans. It has already happened with this credit crunch. (whether or not rates should have raisen two months ago is another question). Raising rates at this point would also signal the end of any liquidity and create massive (and pointless) panic as otherwise healthy corporate players lose access to short term funding (which they typically draw on for day-to-day operations).
Fed Has Already Introduced `Temporary' Easing: Chart of the Day By Mark Gilbert Aug. 16 (Bloomberg) -- The U.S. Federal Reserve has already introduced a ``temporary'' reduction in interest rates by driving the four-week Treasury bill below the Fed funds target, says Charles Diebel, a strategist at Nomura International in London. ``It is clear that a `temporary' easing has been put in place by the Fed,'' Diebel wrote in a research note today. ``This is what has really spooked markets overnight.'' The chart of the day shows the four-week bill rate has declined to 4 percent, below the Fed target of 5.25 percent and the actual rate, which dropped to as low as 1 percent last week and rebounded to 5.25 percent yesterday from 5 percent the day before. ``If this artificial suppression of short-term rates has to be maintained, which we suspect it will, then the Fed will eventually formalize the de facto ease with a move lower in the official target,'' Diebel wrote. ``It is likely to be at least a 50 basis-point move if and when it comes.'' William Poole, president of the St. Louis Federal Reserve Bank, said yesterday that the subprime mortgage rout doesn't threaten U.S. economic growth, and only a ``calamity'' would justify an interest-rate cut now. The Fed's next scheduled meeting is on Sept. 18. http://www.bloomberg.com/apps/news?pid=20601087&sid=a6_5PxyLQCS8
That seems like a brilliant move. It allows the financial markets access to cheap cash, but does not allow the typical homeowner access to cheaper funds because the Fed knows that the homeowners will use it to borrow more money...and that got us into this mess. For this reason, I don't hold much hope that they'll formalize the de facto ease. SM
or, if maintained for some time, could allow an arb opportunity between the professional and the public (ie professionals have access to cheaper debt), if this is held why would they set up a transfer where they were borrowing against it and lending to the public, thereby bypassing its purpose. I suppose its 'temporary' but if it were to persist I think thats what would happen.
<i>"Core inflation peaked last September at 2.9%. Yesterday's reading came in at 2.2%. The PCE is what the Fed looks at and that bugger last came in at 1.9% which is trending down over the past year."</i> That is hands-down the biggest accounting joke-fraud ever perpetrated on public minions. True inflation is what a dollar buys across a basket of ALL necessary goods & services... starting with food and energy. We breathe, we drink, we shelter and we eat in that necessary order of survival. PCE removes the eat, drink and shelter from its equation. Laughable bullsh*t served steaming hot from the Fed's kitchen to our tables. Bon apetit`
The Fed has not driven T-Bill rates down. In order to do that, the Fed would have to be buying Bills, which they have not been doing. The decline in Bill rates is caused by institutions being too freaked out to want to put their money anywhere else.
Except for the part where the Fed doesn't calculate the CPI, PPI, or Price Deflator studies that most folks point to as inflation indicators.