The current conundrum in the fed's policy is based upon underlying deflationary influences to the dollar and US economy.
The fed, controlling interest rates and money supply, manages inflation. A little is good, a lot is generally bad. However, if the economy goes into deflation, the fed can't drop interest rates below zero, and can't influence policy. That, from the standpoint of the fed, is very bad.
After the internet crash there were strong deflationary influences in the economy. My personal opinion is that they were tied to an overly strong dollar and the 'china effect' of production of goods at next to nothing prices. Underlying them, more importantly, was the aging demographic of the USA and the world. Seniors don't spend - they save. That's deflationary.
So, Alan & Co. decided to rescue the economy from a deflationary spiral by pumping up the money supply and devaluing the USD relative to the non-asian currencies. And about at this time, *coincidentally*, the price of oil soared. That created a bit of inflation, didn't it? The problem is, deflationary influences, outside of the speculative housing market, are still around in the market. That was the whole point of Bush's 'private savings' Social Security reform package - to inject a massive stimulus into the equity market by allowing entry of the huddled masses into the equity markets through their social security accounts. Too bad for Wall St. it didn't go through.
For you, see, despite manipulation & machination, the long yields remain anaemic. That's probably because as the boomers switch from equities to stocks, it will cause depression of bond yields as boomers buy bonds and sell stocks (depressing equity market yields also). Those yields could be pathetic - 3-4%! We may reminisce fondly for the days of a guaranteed 6% tax free yield on the long bond.
But fear not young traders. Yields MUST rise on the far end of the curve and equities must also rise to allow for a cushion before 2010, or a new asset class (convertibles, anyone?) may be preferentially treated by tax laws to improve yield and start a new equity bull market, to be followed by a bond bull market... either that or our society implodes.
THAT's what the conundrum is, and why.
Its just so hard to buy in at these levels, isn't it?
