Will the Fed Actually Raise Rates Next Week? 18 comments
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That's a question not on many minds these days. At the risk of ruining the economy, how can they consider increasing the funds rate? The credit crisis is still around, the housing slump is deepening and perhaps the economic growth picture is not all that rosy. However, we have seen a big surge in the dollar and long term interest rates...which means inflation needs to be contained...by rate hikes. Dollar strength, rising long term yields and commodity price drops are pointing us in this direction.
They've Been Saying It All Along
Fedspeak has been warning us for weeks of an imminent rate hike...it's not if, it's when. Whether this comes in a series of hikes or periodic moves is speculation, but history shows these moves are done in a series. Recent speeches have pigeon-holed the governors in a corner of yes or no. We've spotted a more hawkish tone, and it has been getting louder and stronger. Certainly Bernanke is the key here, but how long can he hold off the pressure, or face a 1970s type problem? He was recently blasted by Congress for reckless behavior (may have been given a CUI...chairman under the influence).
Oil and Other Commodities Are Leading, Not Lagging
Oil prices peaked July 3, and that's when most other commodities also started to decline. For all intents and purposes, these drops may have been precipitated by an increase in the dollar vs. other currencies. We're not calling a flushout of oil here, though it has certainly declined sharply. Any long term chart of crude shows a bullish nature. However, the correlation with the dollar and commodities is very strong, and there is no denying a trend. We could see the dollar propped higher even after the Fed starts raising rates. In fact, it is this recent pickup in the dollar that makes me believe the Fed is going to be aggressive.
Why Would the Market Applaud a Rate Hike?
That's a good question, and for the life of me I can't understand it. Other than a strengthening the dollar, rate hikes are meant to slow a speeding economy and inflation. We've seen rate hikes celebrated in the past (see: 1999). Irrational behavior is somewhat curious and downright illogical at times, but that's what makes markets. Perhaps the Fed being ahead of the curve...let's face it, there is inflation everywhere, and they have been slow to acknowledge it. My money is on a rate hike sooner rather than later, but the market is clearly not considering it. Only about a 6% chance as of Tuesday for a 2.25% Fed Funds target rate. We'll have more clues with the GDP and employment reports this week.
Disclosures: None
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This article has 18 comments:
One has to remember that the Fed is in no way a government agency. It is essentially a private bank that supplies money, with no meaningful government oversight, to commercial banks and now, most recently, to investment banks.
We need to get rid of the Fed. We will never get our financial house in order if we let these servants of the banking industry continue to recklessly print money.
I fear it may be too late.
Cash is king. At least it is right now! Save your dollars and you too can be like Mr. Potter in "It's a Wonderful Life". But let's be a "kinder, gentler" Mr. Potter.
What else is economic news except comedy?
Raise interest rates indeed.
Actually, the move to raise interest rates might be due to an original new theory from the Harvard Business School:
Raising interest rates has the effect of stimulating the economy because, in their financial ignorance, most people think the Fed is trying to raise the rate of their INTEREST in economic matters and so they work harder and save more money.
Who knows, Harvard might be right. Let's give it a try! What do we have to lose except our money?
REAL GDP GROWTH + CURRENCY STRENGTH + HOUSING MARKET STABILITY + INFLATION (esp. food & oil) + UNEMPLOYMENT RATE + STOCK MARKET VOLATILITY + DEFAULT RATES ON CONSUMER DEBT (Credit Cards, Mortgages, etc.) = RATES?
Yes, it was a safe bet this lame Congress would fight increase energy supply tooth and nail, that didn't help. Demand destruction occured big time with such a rapid spike and I am not talking about just gasoline. The oil spike created a second market crash in June.
Demand at $3.50 gasoline won't skyrocket the U.S. back up. It's over for the short and mid-term, the damage has been done. $2.00 gas would indeed help, but it still will not cure the damage already done!
With rates, raising them very marginally provides the global investor some signals the U.S. is finally willing to confess it's financial suicide pact and accept it's pain for it's stupidity. We still need the world and the world still needs us. But that doesn't mean they will all hang around as our economy goes down in flames over the next few years or create additional blowbacks to attempt to force us to stop exporting inflation.
Fed will raise marginally each quarter by .25. Raising the short-term rates quickly was tried in the early 30's. This acclerated the pain fast but it was by no means the cause of the Depression. That, like today was overinflated valuations and paper chasing paper on Real Estate and Radio. Today we have Real Estate and Internet. Same deal. Bernanke is a student of economic history, specifically the Great Depression. It's the malinvestment problem we must solve and the biggest abuser is no longer the Fed, it's Congress and Treasury.
More proof of the incompetence of the FED and its detachment from reality. When you recruit your economists and financial experts from academia, you doom yourself to the inanities and unrealistic solutions of stupefied mental processes and theoretical computer modeling based upon inadequate data and unproven suppositions.
Didn't our government learn anything from the disaster of Alan Greenspan? Remember, he caused 7 recessions with his blundering. Are Bernanke and company determined to top this record of incompetence by creating a worldwide depression?
No.
Forget all thoughts of a soft landing, there is no possibility for that. Housing must crash and businesses must go bankrupt. That is all there is too it. Not if but when.
Oh, I don't think I'm being extreme at all. The truth is that our economic growth model is based on unregulated credit rather than on good fundemental economic princples. To support this artificial growth, increased printing of fiat currency is essential.
The current sub-prime mortgage disaster is a direct manifestation of too much liquidity provided by the Fed. When there's too much money available, lenders are falling all over themselves trying to make loans; hence, with rising home prices, they are willing to make ARMs to unqualified borrowers based on the unreasonable expectation that home prices would continue to rise and these ridiculous loans would later be refinanced under more favorable terms and conditions. This current event can be likened to a variation of a Ponzi scheme.
Cental bank interventions, short term fall in oil prices and bear market sucker's rallies may support the dollar in the short term, but I see no long term improvement until the Fed sucks it up and stops this reckless printing of money.
There is one, and only one, underlying cause for the malaise that is pervading the economy, today, and it is the outrageous price of oil and the egregious greed that is driving it. When, not if, the Republicans in the Congress force the issue to a vote on their Drill Here, Drill Now, Pay Less program the cost of oil will plummet below $70 and all will be well, once more.
As to the Democrat nonsense of 10 years before oil starts to flow, this is more Bull...! Those companies in the business of erecting oil drilling platforms over water and drilling are promising that oil will flow from coastal waters within 12 months or less. The ANWR will take, about three ears before oil flows. And, with the abundance of such oil on the market, American energy independence will become reality and all the associated cost will stabilize at reasonable and affordable levels for, at least 50 to 100 years.
With that much breathing room, nuclear power plants will be built, coal technology will be utilized, and hydrogen power will come on line. As an added bonus, Iran will lose its clout as a terrorist nation and will collapse. With Iran, will go the terrorists who depend on it for funding. They, too, will fade into history.
This is a scenario that does not require charts and rhetoric to dazzle and baffle. It stands on logic and a readily apparent conclusion. Analysts with a living to make will never accept it.
The, only, thing that appears to have changed is that the Treasury will have the funding parceled out to them instead of in one lump sum. And, the taxpayers will be stuck with a lot of worthless paper and a huge debt.
We the People MUST flood Congress and the White House with emails, faxes, and telephone calls expressing our anger and intent to throw everyone, both parties, out of office in November. Then, we MUST do it! Otherwise, the beat goes on and we continue to suffer.
Bottom line: They are all a bunch for corrupt, self-interested, incompetent fools and are not worthy of our trust or our support. NO on everyone in November.
When the economy is debated by McCain and Obama in a few weeks, listen carefully and decide which one is more likely to serve this nation and We the People's interests - Not theirs and their Party!
Remember, Obama is pushing a Marxist agenda that will bring disaster to the economy and the investors with their IRAs. 401-ks, and Roth’s. Vote, accordingly.
As has been indicated by several respected sources, most of today’s stock market collapse can be laid at the feet of ETF’s. Those computer driven programs may be wonderful in an upward directional market but when things are unsettled, these programs cannot think, logically. All they are capable of doing is to react along pre-determined programming. Small and independent investors are unable to bring reason into the market and, thus, it moves in extreme and devastating directions at a pace that defies understanding.
Until things settle down, I recommend that ETF trading be suspended for an indefinite period. The next major move should ban, permanently, the addled brain politicians’ ability to interfere in the market and business decisions. Let things follow their natural course and allow the chips to fall where they may. Didn’t we learn a thing from the incompetent and brainless interference in business activity by FDR and his fellow socialists in the 1930’s? They took a normal 12 to 18 month disturbance and turned it into a nine-year depression. Left to their bungling and intervention, today’s Washington lamebrains will duplicate this stupidity. After all, they’re Democrats, aren’t they?