All interest rates are not created equal. When someone says "interest rates are rising and that's good for the dollar" or "interest rates are rising and that is bad for gold" or and especially "interest rates are rising and that's bad for the economy," they are either purposely leaving out important details in support of their bias or they are ignorant of them.
So 4.5 years after Paul Krugman bullhorned ZIRP! in the New York Times in December of 2008, in the midst of an epic systemic panic, the policy remains with us and so too does an important component of a coming yield spread carry trade by the banks, which have been outperforming like crazy lately in anticipation. ZIRP is the key, and Bernanke just set the record straight with his jawbone yesterday.
From the MarketWatch article:
"The central bank has gone to great pains to stress that this tool is separate from the bond-buying program."
QE, which is the buying and monetization of longer-term Treasury bonds and distressed MBS garbage, will end because global supply and demand dynamics say it will end. I would go so far as to speculate that the Fed wants it to end sooner rather than later, when the job of managing peoples' expectations is done.
"There will not be an automatic increase in interest rate when unemployment hits 6.5%," Bernanke said in the question-and-answer session of a speech to economists."
Those looking for inflation need look no further than this statement. With the economy gaining traction, which I think it is slowly doing, and with the banks incentivized to get the printed money out there ('Taper to Carry'), the cost effects side of the inflation equation should start becoming apparent to the public. The public will start to buy assets (in my opinion the precious metals, commodities and beaten down emerging world) sometime well after the smart money have already positioned.
"The Fed chairman drew a clear distinction between asset purchases and rate hikes. The purpose of the asset purchases is to give the economy some forward momentum, Bernanke said"
The Fed controls one ("rate hikes" meaning Fed Funds rate, which is now ZIRPed) but not the other ("asset purchases", which applies to the rest of the Treasury yield curve). The problem though is that at some point the effects of the inflation will start to become apparent and then there will be questions about whether or not the great Hero can put some very bloated Genies back into some very small bottles.
"Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics, said he was sticking with his forecast of a September tapering after Bernanke spoke."
Wow, did a media quote robot actually say something that I totally agree with?
"And he stressed that the Fed was concerned about the current very low inflation rate."
Seen the stock market's "copper roof" lately? The chart looks like the HUI did 160 points ago. In other words, brutal.
"Bernanke defended his decision to lay out a potential timetable for winding down asset purchases after the Fed's last meeting."
Again, people need to get off the QE obsession. It was just one phase of the inflationary operation. The thrust phase. The afterburner, in the form of a banking sector profit motive, is yet to really kick in. Don't take to heart lazy analysis.
Bernanke felt compelled to speak after the FOMC Minutes were released. This is the jawbone market and these are smart people with, in my opinion, a well laid out plan given that they know China and Japan may be liquidating Treasury bonds to help in servicing their own internal issues.
The biiwii.com copyrighted "Taper to Carry" or "T2C" makes sense because it is a logical extension of very real events currently in progress in an over-managed market. With Bernanke's strong pro-ZIRP words yesterday T2C has become an even firmer plan. QE is one thing, ZIRP quite another. But T2C would incorporate both of them into one grand scale operation with the banks and financial institutions borrowing funds nearly for free, marking them up and lending them out.
It's brilliant actually, and as of yesterday the hero is very much with the script, which calls for a continued and intense inflationary attempt. To the bears and deflationists out there who keep sending mail, I again state that this is an attempt, not a guarantee of success for our heroes. But it is the attempt at creating inflationary effects that we are now interested in. The inflation itself has already been manufactured. The delivery system seems to be coming along now as well.