Econ Forum: The Tightening Begins

TGregg

TGregg

Well Uncle Al is tightening. Who woulda thunk he'd start pre-election? Not I. For details, go see:

http://www.federalreserve.gov/releases/h6/Current/

He's trying to keep it somewhat of a secret, saying that "deflation remains a threat", but his actions are clear. So, I have three questions for the crowd:

1. Does this mean we can expect to see at least one round of a raise in the reserve rate pre-election? And when (most likely this year, IMO, if it happens pre-election)?

2. What does this spell out for the markets thru November `04? Rising interest rates? How does this affect earnings and equity prices?

3. Is this a minor burp in the continued money supply expansion, and thus no immediate concern?
 
Quote from TGregg:

Well Uncle Al is tightening. Who woulda thunk he'd start pre-election? Not I. For details, go see:

http://www.federalreserve.gov/releases/h6/Current/

He's trying to keep it somewhat of a secret, saying that "deflation remains a threat", but his actions are clear. So, I have three questions for the crowd:

1. Does this mean we can expect to see at least one round of a raise in the reserve rate pre-election? And when (most likely this year, IMO, if it happens pre-election)?

2. What does this spell out for the markets thru November `04? Rising interest rates? How does this affect earnings and equity prices?

3. Is this a minor burp in the continued money supply expansion, and thus no immediate concern?
More...

Where do you see tightening? All I see is expansion.

thanks.
 
Fed Fund futures imply an 80% chance of a quarter point tightening between now and June. Think about it. What's the more helpful "political message" for the Fed to send out on behalf of the administration next summer. We're too scared to raise rates because the economy is on the brink of collapse or we need to bump a bit here because this recovery is so robust.
 
I think the thing to keep in mind is, if you're printing money like it's going out of style, you are creating inflation period. The US is printing money and issuing bonds like crazy, and I've kept quiet about it long enough. The bottom line is, the fed can only ignore reality for so long. The market is no fool, look at mortgage rates. Why don't they go lower even though the prime rate is in the toilet? It's because these lenders realize that inflation is upon us even though the fed lending rate does not reflect it. The value of the dollar decreases and and ruins their return if they go too low now (fixed mortgages). The fed is just demonstrating how much of a tool it is of the executive branch of this government, even though it is supposed to be fiercely independent! The fed has effectively demonlished fixed income investments and thus investors flew into equities because it is the only place to go with a possible return, and now you have our current bubble jr. with valuations in some cases higher than march 2000! It's a gamble this government is taking: hoping that corporate profits will come back very strong to offset this deficit spending and inflation-causing behavior. Or atleast hoping that with rates collared the *perception* of a friendly equity environment will stay in place until the election is completed. I sure hope they are right with the earnings gamble, but it won't be affecting my income any, just those poor unfortunate souls who also got taken to the cleaners in previous blowups. I'll trade it up, down, or sideways.

Goodluck,
 
It seems like "inflation" is clearly creeping up both locally and globally. The fact that federal reserve is downplaying this will ultimately result in lower quality of life and rising cost of living for people.
The inflation is clearly evident in rising prices of commodities, service, insurance, gas, capital items, real estate, industrial component, nickel, copper, gold, platinum etc. etc...
I guess federal reserve is adamant to keep the rates low. By understating inflation they can keep printing money and also justify the current credit bubble...
Considering how the fed has been acting lately makes one wonder that the risk of some financial dislocation and bursting the credit bubble must be a primary issue in their mind!
Lets hope all goes according to the plan otherwise who knows what will happen!
The only thing is with all this liquidity pumped into the system, the low interest rates, lower dollar prices and growing deficit seems like China is a big beneficiary! After all China and Japan alone hold almost half of all the U.S. government securities outside U.S. (nearly $600 billion)! They are sure doing their part to keep this going!!
 
Quote from Avalanche:



Where do you see tightening? All I see is expansion.

thanks.
More...

Look at the one week averages on M1-M3, expansion has stopped, and tightening has started. It's very early, and may be only a minor thing - the Fed could easily revert to it's expansionist ways on Monday. But it's very curious in light of the Fed's recent comments about deflation still being a threat.
 
Quote from TD80:

I think the thing to keep in mind is, if you're printing money like it's going out of style, you are creating inflation period. The US is printing money and issuing bonds like crazy, and I've kept quiet about it long enough. The bottom line is, the fed can only ignore reality for so long. The market is no fool, look at mortgage rates. Why don't they go lower even though the prime rate is in the toilet? It's because these lenders realize that inflation is upon us even though the fed lending rate does not reflect it. The value of the dollar decreases and and ruins their return if they go too low now (fixed mortgages). The fed is just demonstrating how much of a tool it is of the executive branch of this government, even though it is supposed to be fiercely independent! The fed has effectively demonlished fixed income investments and thus investors flew into equities because it is the only place to go with a possible return, and now you have our current bubble jr. with valuations in some cases higher than march 2000! It's a gamble this government is taking: hoping that corporate profits will come back very strong to offset this deficit spending and inflation-causing behavior. Or atleast hoping that with rates collared the *perception* of a friendly equity environment will stay in place until the election is completed. I sure hope they are right with the earnings gamble, but it won't be affecting my income any, just those poor unfortunate souls who also got taken to the cleaners in previous blowups. I'll trade it up, down, or sideways.

Goodluck,
More...


Great post. My dad says the same thing. He was on the money about the last bubble.

Thats why I scraped up some change to buy a couple options contracts. Hope this government gamble will not pay off, so that I will get paid.
 
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