‘Fifty Basis Points, Baby!’
Several readers discussed future Fed rate decisions. “Topic: Bernanke and the June Fed meeting. I think the results of the next meeting are huge in terms of the psychological effect. What signal does it send to Wall St. and all the whiners who don’t want their bubble taken away. What if he doesn’t raise?”
One had this answer, “To answer your question, if the Fed does not raise rates - INFLATION >7%.”
Another did a ‘what if.’ “If BB blinks on the June rate hike, look for long-term Treasury bond yields to rapidly increase to above 6%, with mortgage rates considerably higher to price in a growing risk premium. The housing bubble might ‘decelerate’ more quickly if the Fed stands pat.”
To which another replied, “Another reason why the housing bubble is toast no matter what BB does.”
The Lowell Sun. “Hey, that Ben Bernanke looks like he’s determined to show us he’s no wallflower, eh? OK, Big Ben, for the past month you have talked the talk, so let’s see if you and your friends at the Federal Reserve will walk the walk.”
“As you and your colleagues have so astutely pointed out, inflation is at hand. And it’s not just at the gas pump. So no more of these wimpy quarter-point interest-rate hikes. How Greenspanish. Show us you’re really serious and give us 50, as in basis points.”
“That’s right, half a percentage point. When it comes to that meeting in Washington next week, show ‘em your fangs. Tame that inflationary beast.”
“Through the first five months of this year, inflation is running at a seasonally adjusted annual rate of 5.2 percent, according to the government. So-called core inflation, which strips out such ‘non-necessities’ as gas and food (Gee, who needs that?) is still over 3 percent.”
“I know I’m not getting a 5 percent raise this year. Are you? If not, that means you’re losing spending power.”
“Quite frankly, interest rates aren’t that high, historically speaking. A prime rate of 8 percent would have been welcome in, say, 1982. Even as recently as 2001 it was 9.5 percent.”
“Get crackin’, Ben & Friends. We know you’re going to raise rates at month’s end. We’re just not confident you’re going to flex your muscles enough. Give us the medicine this economy needs. Fifty basis points, baby.”
“It isn’t the Fed’s responsibility to ensure the stock market goes up. It isn’t the Fed’s responsibility to keep the housing bubble, er, market, afloat.’
“The Fed’s first and foremost responsibility is to prevent prices from rising too rapidly in our economy. If Ben & Friends don’t get up to speed, that’s going to continue to happen.”
“Show us you’re really serious and give us 50, as in basis points.”
No way, no how, it ain’t going to happen!
They should have down 50bps last year - several of us here were asking then. Now - No way, they will cause too much damage.
I agree. .50 risks market meltdowns, and the current readings on inflation and a slowing economy do not seem to justify such a dramatic increase. Remember, though, that Greenspan’s M.O. was to raise .50 at the end of rate hike cycles.
More important to the equity markets (and housing) will be the Fed’s language. Anything to the effect that “more firming may yet be required”, will kill equities and gold. My guess is that this is what we’ll hear.
I think the markets are already melting down, because of the way that Ben Bernanke’s voice inflected when he said the Fed was going to try to maintain price stability.
The fed minutes noted that they considered a 50 basis point hike last time around. The stock market will react negatively when they release the minutes again if there is a hint they considered 50 basis points this time. I think we have a 10% chance of no raise, 75% chance of a 25 pt raise and .15% of a 50 pt raise.
I agree. There’s too much risk of triggering a meltdown in the hedge funds with an unexpected 50BP move. BB will move nice and slow and will telegraph it in advance.
frick the hedge funds they are half the problem
You forget ONE thing. The meltdown in real estate will not come from the FED only. It will come when Japan starts increasing interest rates and kills all these stupid institutions that were playing the stupid carry trade game, probably with a lot of debt securities related to US real estate. Borrow in yen at zero percent and buy Fannie Mae’s, General Motor and Ford junk bonds. A first rate increase is expected in July in Japan. Europe will also be playing catch up with the US and boost it’s interest rates also. The real estate bubble will desintegrate with the busting of the carry trade bubble in Japan.
Why the sudden tough talk at the Fed then? In my next post I have some stories about the continuing ‘exotic’ lending and the related defaults. These mortgage guys and the clueless borrowers need a shot across the bow.
Tough talk is the cheapest option for the Fed. It costs them nothing if they can scare you into submission. Expect the talk to get tougher as the action gets weaker.
And that tough talk/no action scenario will last until FED credibility goes to zero. Then all hell breaks lose as dollar confidence collapses. The only way to preserve the dollar is to jack up rates to seven or eight percent…and we all know that would be impossible because the whole financial sector would melt down. Ain’t going to be pretty no matter what BB does.
Talk is cheap. They’ve tried “talking” tougher regulation on suicide loans and the industry has reacted by churning out even more at a faster pace before real regulation hits them.
It’s time for some tough love, Raise those rates !
“Tough talk is the cheapest option for the Fed” — the fancy *technical* term we economists use for ‘talk’ is ‘moral suation’
Ben: I agree. I beleive there is an outside chance of a 50 bp hike. FOMC members have been in unison in regard to their views about inflation and resiliency of the U.S. economy (like it’s choreographed). Also, this could be BB’s line in the stand for instant credibility/respect. I beleive it could be as high as a 30-35% chance.
So why isn’t it going to happen (50 point increase)? Because that would tank the equity markets of stocks, real estate, and precious metals? Do we have any evidence the fed, or the present administration, cares about retirement funds or people or with investments in these? Or are the powers that be the lenders and influential foreign governments who serve to lose from inflation of the US dollar?
The way I see it is this: the Nasdaq flopped over dead because the wealth of dot.com companies were solely based on speculation–there was no substance to dot.coms at all. Current companies have business models, and the production economy is okay, so the people being hurt by a stock market collapse are retirement funds that have bought overvalued stocks, or those who bought stocks out of fear because “everybody knows” the dollar is going to collapse. Those who will lose from the housing collapse are recent mortgage holders and those building new homes, and those who will lose from gold are those who tried to jump in on this latest bubble, or the perenial bears who didn’t sell when they should have. I don’t think any of these groups have much say over what will happen to interest rates.
Furthermore, Bernanke, in recent statements, after his “tough on inflation” speech, has been saying essentially that the general economy is okay, and people are paying their mortgages okay, and in other words we wouldn’t be hurt greatly by a rate hike.
So I think a big one is not something that can simply be dismissed as something that “ain’t going to happen.”
“Do we have any evidence the fed, or the present administration, cares about retirement funds or people or with investments in these?”
Yes. The reason current workers pay FICA through the nose is because of a commission headed up by Alan Greenspan in the early 1980s, which hiked the payroll tax in order to shore up the social security system. Otherwise, the entitlement programs would be in far worse shape than they already are.
Amen. SS is the largest tax paid by the vast majority of taxpayers and businesses. 13+% on every dollar. Greenspan/Reagan catered to the voters (old people vote). I remember as a child going over to my Grandmothers old folks apartment. They used to give away free cheese to the elderly living there and their rent was subsidized I believe at the state level. Then, a few years later seniors were comparitively rolling in cash. Me thinks that somewhere down the line FICA will be raised another percent or two.
Another fun FICA tax factoid. Somehow the rate of increase of the income cutoff for paying into SS goes up faster than any CPI. Most people probably don’t realize that once you make $90k per year, your contribution to FICA stops. So the higher income taxpayers actually get a break at a certain level. IMO - inflation should be based on this formula whatever it is, not the feds CPI which does not including food, fuel, or housing.
If the Pres and the Senate get their way with their AMNESTY bill, the illegal aliens will suck the welfare/social security system dry in 5 years. You seniors won’t get squat.Let’s sell them all overpriced housing with overpriced loans to get even. Anyone see where some domestic lender will make home loans to illegals in Mexico?
SF Mechanist wrote
“So why isn’t it going to happen (50 point increase)? Because that would tank the equity markets of stocks, real estate, and precious metals? ”
I don’t think the Fed gives a rat’s a*& about supporting precious metals prices. In fact, I think the Fed would prefer to see the price of gold go way down.
I do think you made an interesting observation that the Fed’s actions the last 8 years have no negative effect on those who are long term investers (401ks, IRAs, and real estate). However there are very few people who have any savings worth a hoot in their 401ks and IRAs. Those who bought their homes before 2001 and used traditional borrowing (20% down and 30 year or 15 year mortgages) and intend to stay in their homes another 15 years have little to worry about - unless the economy gets very, very bad. The R.E. crash will undoubtedly undershoot the curve and homes even with ocean views will probably be undervalued 5 or 6 years from now. If unemployment goes double digit, those honest to goodness traditional mortgage payers may be in peril too.
“I don’t think the Fed gives a rat’s a*& about supporting precious metals prices. In fact, I think the Fed would prefer to see the price of gold go way down.”
When the dust settles on the gold price crash underway, I suspect it will become apparent that the federal government was a major factor — close to a replay of the Panic of 1869, but this time the hedge funds and gold bugs will turn out to have been the sacrificial lambs which helped keep the dollar strong …
http://www.bartleby.com/65/bl/BlackFri.html
“When the dust settles on the gold price crash underway, I suspect it will become apparent that the federal government was a major factor — close to a replay of the Panic of 1869, but this time the hedge funds and gold bugs will turn out to have been the sacrificial lambs which helped keep the dollar strong …”
There are not enough investors and speculators in gold (yet) for the Fed to hit the gong (as in The Gong Show) on precious metals. But they (the Fed) do want to drive the prices down. I’m doubtful we will ever see gold below $500 per ounce again. The Fed seems to be in the business of creating bubbles, catching a bunch of little people bent on greed in the bubbles, then popping those bubbles. But the little people are not really into metals. I think people are wising up and are going to stop consuming and start saving with reasonable asset allocation plans where one asset balances out another asset. I.E. buy gold and buy Treasury notes, as well as stock mutual funds.
“I’m doubtful we will ever see gold below $500 per ounce again.”
I’m doubtful as well — at least until the end of the summer…
P.S. Someone posted a great long-term price chart for gold just last week. It showed that, over a couple of centuries, the price of gold has periodically spiked up, then reverted to a long-term mean around $350 (in 2004 dollars, if memory serves). This squares with other articles I have read, which suggest the price of an ounce of gold has held rough parity with the price of a nice tailored suit, for centuries running.
But maybe this time is different
actually, about gold in the long term being priced to a nicely tailored suit, I heard the same thing long ago. Which is why I will never have more than ten percent of my assets in gold and platinum. But we have to pay for the $560 billion compassionate conservatism (a.k.a. Prescription Medical Benefit) - the first big Democrate program by the former conservative Republican Party. We have to pay for Hurricane Katrina cleanup - unprecedented disaster aid of $200 billion (some billions of which was wasted, of course) and not to forget we have to pay for the war against terrorism, which is necessary (at least to people who know how to reason). All this is inflationary, some good, some bad, and competes against the small guy trying to save money. If taxes don’t go up, how will government raise funds to cover the rest? Easy: Inflate the currency, cause wages to go up and lift people to higher tax brackets. Hence precious metals are a good part of any investor’s portfolio.
I’m generally less concerned about unemployment. Starting in 2001, the number of people entering the 55 and older age category began outpacing those entering the 20-54 age group by about a million people per year (about 1.8m +/- per year moving into the older age category, and about 800k +/- per year moving into the 20-54 year age group). The employee participation rate is about the same for a low twenties person as a mid-fifties person. We’re losing labor force pretty quickly now.
This dynamic is projected to continue for a couple of decades.
In 2008, the first wave of Baby Boomers turns 62 (a psychological trigger point for people to stop working and begin collecting SS). At that point, the loss of labor force will really pick up.
I don’t know what the ultimate ramifications of this dynamic will be, but, all else equal, it seems to me that it argues for lower unemployment (and potentially upward pressure on wages).
And what is to keep China from cashing in those IOU’s if they don’t like the return they are getting from government bill’s and bond’s. The Fed is stuck between China and an inflation rate that is unacceptable to bondholder’s. Here comes 50 points.
China is already doing this by using their US dollar cash reserves to buy influence in Africa, the rest of Asia, Iran, Venezuela and even Canada.
I would image the loud squealing from Wall St & NAR if it goes up 50 pts. There will be a lot of pill popping and fainting on CNBC.
Wussies.
‘To answer your question, if the Fed does not raise rates - INFLATION >7%’
If the reader is correct about 7% inflation, won’t that cause a fuss?
Wall Street benefits from inflation. You could say they are the consituency of inflation. Deflation has no constituency, as far as I know.
Deflationary recession is a natural economic event which erases mal-investments. The Fed has been putting corrections off for years now. Have they reached the end of the line?
There is no constituency for lightning, but it still happens.
Exactly. The Fed has been putting off corrections because the short-term fix is to inflate. Their natural tendency is to inflate, and Bernanke is famous for his fear of Great Depression-style deflation.
A crude historical timeline seems in order here:
Late 1970s: G. William Miller continues Great Inflation which was initiated under his predecessor, Arthur Burns. (Burns also initiated the policy of foreign creditor purchase of $US assets with current account surpluses).
1979 - 1987 Paul Volcker takes over at Fed and sends the Fed Funds rate over 10% for the first time EVER in order to stamp out inflation. It works, and the US does not go into a deflationary collapse, either.
1987 Alan Greenspan takes over at the Fed. Bond market collapses in the spring (deja vu all over again in 2006) and is followed by Black Monday — Oct 19, 1987 — when the stock market is hammered by an 18sigma black swan event which lops 20% off prices in one day. Everyone thinks it is the start of the second Great Depression.
1988 Working Group on Financial Markets (aka Plunge Protection Team) is organized. The stock market proves amazingly resilient, rebounding strongly from the 1987 crash and making those who “bought the dip” look like financial geniuses.
1989 Japanese stock market collapses, and Japanese real estate begins a deflationary period destined to last for more than 15 years.
1990-1996 US Housing market crashes, a consequence of the end of the Cold War, and cutbacks in defense spending (so much for the vaunted “peace dividend”). Some coastal CA markets lose 30% of their value.
1994 Mexican peso crisis. Start of dot com bubble.
1997-1998 Thai baht crisis morphs into Russian debt default & LTCM collapse and bailout. For a moment, it appears the entire world financial system is at risk of collapse due to the failure of a single hedge fund. Greenspan cobbles together a bailout package with the help of friends in high places on Wall Street.
1998-2006 Having learned the lesson that LTCM was “too big to fail”, the hedge fund industry starts to grow rapidly. Housing bubble also takes off, with average time to sell in the US dropping to its lowest sustained level in history. US housing sees the largest sustained real price increase in history over the next eight years.
2000 Dot com bubble collapses.
2001 9/11 attack.
2002 US asset markets look really sickly.
2002 - 2004 Fed drops interest rates to negative real levels, and housing market wealth effect kicks in, leading to several years of huge amounts of cashout ATM financing used to pay for cars, boats, vacations, and other consumption goods and services. Meanwhile, US savings rate sinks to negative levels for the first sustained period since the great depression.
2004 - 2006 Fed begins measured series of rate hikes, in a belated effort to slow down the speculative binge which it inadvertently triggered with negative real rates and implicit government insurance for too-big-to-fail hedge funds
2006 Housing bubble collapses…
—————————————————————-
In retrospect, I think the important dates will turn out to have been:
1987: Greenspan takes over at Fed, uses massive injections of liquidity to bouy stock market.
1998: LTCM bailout creates huge moral hazard problem, leading to rampant growth in hedge fund industry.
2002: Negative real fed funds rate leads to massive increases in US housing prices.
2006: Bernanke takes over at the Fed, and faces up to the global financial imbalances, out of fear that failure to do so will result in a calamitous collapse within his term at the Fed.
You left out something from 2002: Bernanke joins Fed Board of Governors, warns loudly of threat of deflation, supports low interest rate policy.
I left much out… Thanks for your addition, and I welcome others.
Deflation has historically been a good time to be long current and future dollars. A good way to go long future dollars is to buy Treasury bonds (a Treasury bond is no more nor less than a promissary note from Uncle Sam to make a fixed series of future nominal dollar payments). Many posters on another thread seem to be getting into Treasurydirect accounts (a way to purchase T-bonds directly from Uncle Sam w/o paying a Wall Street middleman).
If inflation equates with debt forgiveness, then doesn’t it stand to reason that deflation equates with debt enhancement, which benefits lenders? There are people and governments who have lent a whole lot of money that do not want to see it evaporate under inflation.
“If inflation equates with debt forgiveness, then doesn’t it stand to reason that deflation equates with debt enhancement, which benefits lenders?”
Yes, yes, yes. This is why Paul Volcker was acting in favor of “his base” when he cranked up interest rates sky high in the early 1980s. Accelerating inflation (the kind that turns out to be worse than expected, and which the Fed governors have been warning us about almost daily for several weeks now) is helpful if you are a debtor with a fixed mortgage, as the inflation eats into the real cost of your future loan payments; this was very relevent in the 1970s, when Union contracts hard-wired in COLAs to annual pay increases, and almost all homeowners had 30yr conventional mortgages.
Fast-forward to 2006: Inflation will not be all that helpful if you hold an ARM, as those interest rates adjust, and good luck at getting those pay raises if inflation heats up — labor has lost its heft. However, holders of long-term Treasuries were creamed in the 1970s and they will be again if helicopters play a significant role in monetary policy over the next few years.
For a good historical retrospective, check out “Secretes of the Temple” by William Greider (nontechnical, readable, written by a financial journalist, but bring along a fork-lift to the library, because this tome requires heavy lifting…)
Getstucco - the US is the biggest debtor of all… don’t you think that single fact argues for continued inflation and helicopter behavior. Why do you think Bernanke might hang tough?
The dollar is the reserve currency, which means that oil and many other goods are paid with them. If Bernanke were to abandon the current attempt to rescue the dollar, the United States would have to repay any future debts in foreign currency anyway. In short, inflating away current debts is an option, but not near future debts. Therefore, given the fact that we must borrow now merely to remain solvent, repacement of the dollar as the reserve currency is not a good option.
As I understand it, hyper inflation occurs in countries that must pay their debts in foreign currency, a la Weimar Germany and modern Argentina, et. al.
“Getstucco - the US is the biggest debtor of all… don’t you think that single fact argues for continued inflation and helicopter behavior. Why do you think Bernanke might hang tough?”
Devaluation = guaranteed depression (cf. Argentina, early 1990s)
Continued measured series of rate hikes = guaranteed recession and heightened risk of deflation, but helicopter drops down the road will soften the blow. But the first order of business is to end the conundrum, pop the housing, gold, emerging markets, consumption, and credit bubbles, break the speculators, and trim the hedges. Otherwise, the systemic risk associated with the symbiosis and the conundrum will just keep growing and growing until the Fed is in the same position as the BOJ was in the early 1990s: Trying to end a deflationary depression by pushing on a string.
One more thing:
Devaluation also would amount to the end of the $US as we know it, in terms of lost hegemony and lost reserve currency status. This would signal the end of the US’s fleeting position as the sole economic superpower — not really a desirable state of affairs, IMHO.
“As I understand it, hyper inflation occurs in countries that must pay their debts in foreign currency, a la Weimar Germany and modern Argentina, et. al.”
Hyper-inflation is a desperation measure, and we are not yet that desperate, despite the tendency of some posters here (mea culpa) to occasionally strike a slightly desperate tone in our posts. This is no more nor less than cheap talk.
I am not too familiar with the history of the Argentina situation, but I believe it had to do with a crushing foreign exchange debt burden which forced them into a position of “declaring bankruptcy,” which at a national level amounts to printing money far in excess of the value of national production — devaluing the currency. The case of the Weimar Republic was far more extreme; the Treaty of Versailles left Germany with a crushing debt burden, which forced upon them a choice of trying to repay the debt while suffering through a Sysiphian, quasi-permanent, externally-imposed depression, or printing paper until the debt payments were affordable. The point you raise is very important — if the debt needs to be repaid in foreign currency, then neither devaluation nor inflation will potentially save you.
See the what the visionary J M Keynes had to say in “The Economic Consequences of the Peace” for more on this non-solution, which quickly led to the rise of the Nazis and the morphing of WWI into WWII — http://en.wikipedia.org/wiki/The_Economic_Consequences_of_the_Peace
I really don’t think we are on the path to inflation over 7% right now (at least not in the absence of a collapse in the dollar).
Short term interest rate increases tend to take 18 months or so to really impact inflation. There have been a lot of short term interest rate increases in the last 18 months whose effects have not been fully felt yet.
It’s already 7% to 8%. Remove all the fudging like the hedonistic adjustments, you get 7% to 8% already! As for “core” inflation this measure is a damn scandal! It measures inflation by removing important things like food, energy and rents. How the hell can these morons called economists, stand for that shhiit!
I don’t see it. .50 pts is alot,if Ben did raise that much I don’t think standing under a tall building would be a good idea,
Here’s why I think inflation will be a problem and rates will have to go up. It’s a report that will be out next month:
http://www.bloomberg.com/apps/news?pid=10000103&sid=acqbH7wK9LK8&refer=us
Essentially, the Federal Reserve will tell us in July that they foresee wage inflation ahead, as the baby boomers with the skills leave the job market and the less experience and less enthusiastic and less numerous younger set are left to hold the ropes.
25 basis points this month (June), then the stocks get a big shot in the arm, gold drops to $550 per ounce, then in July this report comes out and gold will perform the same as in 2005 with no corrections for another 9 months past $850 per ounce. Interest rate hike in August or September will be 50 basis points.
Kind of on the same subject. My sister and I and her boyfriend sometimes go to a trendy restaurant for breakfast. The staff there is a bunch of young people (late teens to early 20s). They have bad service, ignore customers, and we basically turn around and go to IHOP, which has more mature waitresses. They at IHOP are very personable and professional. Last night my sister and I ate at Macayos. Our waiter was older, probably in his 50s and he was excellant. In my own profession (software), most of the older ones are enthusiastic and have the persistance to complete the job. The youngerones, in general, are bored and show up at work at odd hours. These are but a few examples. Younger spoiled people think they don’t need money. When the older boomers are gone, the employers will be crying for them to come back and hence, as the bloomberg article suggests, offer higher wages to keep them on the job longer.
wow, you must be very bitter about not having your youth any more.
“wow, you must be very bitter about not having your youth any more.”
You must be under the age of 30. I’m just relaying what I’m observing. My sister’s boyfriend knows that the rich kids in high school near his part of Ahwatukee all have cars (bought by Mom and Dad). He talked with restaurant owners in this area. They complain that the kids turn down jobs. The fact is, their boomer parents spoiled the kids. Bitter? No. Calling a spade a spade.
I think the illegal immigrants that are in the U.S. are part of the solution, and that the government knows it. I’ll bet there are a pretty fair number of polite Mexican and Guatamalen brick and tile layers who quietly have been studying English and who, when they’re laid off in the bust, will work hard and without complaint at these restaurants. And at many other service establishments that are burdened with lazy workers.
“The young people of today think of nothing but themselves. They have
no reverence for parents or old age. They are impatient of all
restraint. They talk as if they alone knew everything and what passes
for wisdom with us is foolishness with them. As for girls, they are
forward, immodest and unwomanly in speech, behaviour and dress.” - Socrates, as recorded by Plato.
And I suppose your generation was comprised entirely of hard-working individuals when they were in their twenties.
Well look what happened to Greece.
Every generation bemoans how lazy and good-for-nothing the youth of ‘today’ are. It’s been this way for all of time.
It’s not their age that makes today’s youth less productive. It’s their lack of “hunger”. It’s the fact that things have been so easy for them that they won’t have what it takes to combat difficulties when faced with them. I think today’s 40 year olds probably aren’t as tough as 60 year olds with deep seated memories of the last Depression. Experience is the best teacher.
See my post above on the demographic effects on labor in the US.
In 2001, roughly twice the number of people turned 55 than turned 20. Similar numbers are expected over the next 15-20 years. Once that first wave of boomers turns 62, you can expect there to be quite a lot of difficulty finding good workers.
Downward pressure on unemployment, upward pressure on wages.
It does not make sense to strip out food and energy as we all need these. The arguement that they are too volatile. How about putting a 12 month moving average on them and then include them. Also, using rent instead of home prices to compute CPI does not make sense. Unless you want to reduce the entitlement programs the government pays that are tied to the CPI index. OK, I am off my soap box.
You’re right. Overlooking these items was economic self-delusion when they started it.
“Overlooking these items was economic self-delusion when they started it.”
…or legerdemain to force the numbers down. I’m too cynical, I suppose.
Of course, the Fed loved leaving in rent as part of the CPI during a housing bubble when rents were suppressed. Now that housing has peaked and is becoming deflationary, watch them turn around and say, “Well, we decided that mortgages are a better way to measure inflation.” Crooks.
I pointed this possibility out to Ben about a year ago, and he assured me he has a long memory …
You are right. Specially with a computer you can follow these price fluctuation. It’s just a excuse and yes there is a conspiracy.
The horrible trurth about inflation is that the official measure “the core” is rotten to the core. It means nothing and it is a fantastic way of desinforming the people and shutting them up. It also allows the US treasury to finance it’s activities with cheap TIPS bonds indexed to the bunk CPI and streal the investor. Uncle Sam is real crook when it comes to measuring inflation. Indeed.
Quarter point raise in June. No meeting in July, so that is a default pause, though there will be lots of ominous talk about further raises. Rate hikes are there to hold your attention; not that BB is in control of anything. Watch China, Japan, and the European CBs if you want to know what interest rates will do.
Meanwhile the printing presses will be running overtime. Crisp dollars percolating through the system will keep inflation rising. According to the Labor Department the price of imported goods rose 1.6% just in April. This followed a 2.1% rise in March. Inflation is everywhere you look.
Volcker spraung 1% surprise raises on the economy, and he still had to raise rates into the high teens. Today’s debt-laden economy, where most of the ‘wealth’ is in the housing market, just can’t take that kind of abuse. Weak stock markets and currencies are already crumbling under the pressure. If rates ever get to, say, 15% you will destroy housing, and therefore the banking system because banks, not flippers, own all that real estate. Do you really believe the Fed is going to do that? Do you think they don’t know that consumer credit is now $2.1 trillion? They will inflate; in fact they are already doing it.
how’s this for wild a** speculation? A 50 bp increase, coupled with vague language indicating that it might be the last for awhile (depending on the data). It makes up for the July pause, yet sounds soft enough not to spook the markets to much. And then they have two months worth of data to evaluate, and can do anything they want at that point.
Imagine we are at a Fed meeting. A hawk points out that inflation is growing even after over a dozen quarter point moves. At some point they need to get ahead of inflation and cut it off. Why plan two or three hikes when they could do it in one go. Curious that everyone is so afraid of another half point. Mortgages were 9% just a few years back.
I had a 9.25% loan and I was more than happy to get it at the time since I had other quotes much higher. It didn’t stop me from buying , that’s for sure.
Inflation is a lagging indicator. The inflation experienced now does not reflect the rate hikes from the last 4-6 months. All in theory, of course. This is what makes it so tough for the Fed. In order to know what to do today, they basically need to guess what the inflation picture will be at year end.
“At some point they need to get ahead of inflation and cut it off.”
I’m in the .5% camp for that reason. Glad one of my big CDs doesn’t mature until 10 days after the decision.
I wouldn’t call it wild speculation. That is in my opinion the third most likely outcome. The first being a 25 basis points rise. The second being a one and done 25 basis point rise. The third, your case, a one and done 50 basis point rise.
Historical mean is something like 6%. My God, BB has to raise a full 100 bps just to get back to the mean. And we all know what a 100 bps rise would do to this finance house of cards. No matter what BB does, the results ain’t going to be pretty.
Four more measured rate hikes (over six months time) will do the trick…
But can the economy take that? That’s the $64,000 question. I have my doubts that it can, but nevertheless it needs to be done. Whatever the consequences, it’s better to take the pain now because the alternative will turn our currency into notes from a bananna republic.
I believe the answer to your question (”Can the economy take that”) is, amazingly, an emphatic YES! Not only that, but we need to say sayanora to the gaming industry (including hedge funds, condo flippers, casino gamblers, and day traders) in order to stop wasting our time in idle speculation and start producing again. This is what made America great in the past, and what will revive us in the future. But if we keep piddling around with these bubble-blowing exercises, then eventually our can-do know-how will be squandered on nonproductive gambling ventures, and our Asian competitors (CH & IN), with their virtually limitless wealth of human potential, will suddenly pass us as the global economic powerhouses.
Be careful what you wish for GetStucco. The only way we could compete head to head with the Chindians in maufacturing would be if the standard of living of the average american worker fell to be equivalent to that of the average chindian worker.
The current financial system may be appalling but it allows americans to consume more than they produce. When it finally breaks down, the american standard of living will fall with it.
I believe the answer to your question (”Can the economy take that”) is, amazingly, an emphatic YES!
… and therein lies the achilles heel of all of your arguments, GS.
“Be careful what you wish for GetStucco. The only way we could compete head to head with the Chindians in maufacturing would be if the standard of living of the average american worker fell to be equivalent to that of the average chindian worker.”
Sometimes I think this will be the only way we get out of the current mess. I’ve worked as an engineer in manufacturing and have had this very discussion with many suppliers to manufacturing sites.
It won’t be until people convince themselves that they wouldn’t need a Suburban and a 4000 sf house if they didn’t have 4 kids. And they wouldn’t need two lattes a day to comfort them for having to make payments on the above items.
Personally, I wouldn’t mind a return to “simpler” times. In 20 years this country is going to look a whole lot different. And the people with the Suburban and 4000 sf house and 4 kids are going to wonder what the hell happened to their lives and why they wasted so much time and energy on material things.
Either that or they cashed out 18 mos ago and will sit back after their spa treatments continuing to sneer at our poor choices–(not being able to lie thru our teeth as easily as them) for living in our more meager circumstances.
What trick will it do? It certainly won’t place the Fed Funds rate above the real rate of inflation (which is running at 8% according to this site http://www.gillespieresearch.com/cgi-bin/bgn/ ). I don’t see how inflation is contained with that strategy?
“According to the Labor Department the price of imported goods rose 1.6% just in April. This followed a 2.1% rise in March. Inflation is everywhere you look.”
Here is where it becomes too tricky for my underdeveloped knowledge of macro to follow the argument. If helicopter drops inflate our dollars relative to other currencies, then the dollar will fall, making our imports more expensive (i.e., creating worse inflation in imports). Please explain how Bernanke can be Helicopter Ben without creating worse import inflation?
“They will inflate; in fact they are already doing it.”
I love the analysis. What is the ulitmate end-game solution in your view? How does this all end?
“If rates ever get to, say, 15% you will destroy housing, and therefore the banking system because banks, not flippers, own all that real estate.”
Ah, but banks don’t own all that debt . . . whoever bought it on the secondary market owns that debt, er, real estate.
The argument in the Lowell Sun sure did convince ME that rates should be raised 50 basis points. (I had been wondering what might be the correct course of action and how that would affect my own finances.) The Fed’s primary focus, as stated by the writer, SHOULD be preserving the value of money, not priming the economy. Fiscal policy–as in judicious government spending and a sensible tax structure–should be the primary tool for maintaining economic growth. This bust is going to hurt one way or the other; my preference is that we quit the stimulant of cheap money now, take our probably brutal collective losses over the next 18 months and move on to a sustainable growth policy (i.e. pull out of Iraq, initiate universal healthcare, and address the trade imbalance.) A bitter remedy, but necessary.
Vat kind of universal health care, comrade?
The kind Canada is preparing to abandon? The UK version?
Hahaha…
Chip, get your facts straight!
point me to a single source of info saying that we canadians are abandoning our healthcare.
You’re not abandoning it as far as I can tell. However, I’ve met several Canadians (worked with many very liberal ones for the last couple of years) that tell me they have had to get surgery in the U.S. because the wait was too long and they could never get in to see anyone. The way they described it, it sounded like the health care equivalent of the California DMV.
Actually, it’s a prioritized system. I needed an MRI for a chronic wrist ailment, and was told 8 months wait. I was, however, also told that for $2000 the nice folks in Rochester, NY would send up an ambulance for me, drive me down for the day, give me lunch, and MRI my wrist. But, my point is this: The guy with a brain tumor gets his MRI the same day. He is higher priority. Your friends who gripe about being low on the list ARE low on the list because their illnesses are not acute. So go ahead, if you have the cash and don’t want to wait, fly south for a few days.
Canadians know perfectly well that their health care system is much cheaper than the US’s (10% GDP vs 15% GDP), and they are healthier to boot. Everyone, except people who rely on Fox News, knows that the US has the least cost-effective health system in the entire world.
Oh BTW, big business in Canada is very much in favour of the present system, because it saves them a lot of money.
In the US you spend 16% of your GDP on health. You know what the OECD average is ? 8%. Canada is about also 8%, like all western societies. You have lost control of your healthcare costs in the US. Too much lawyers, too much middlemen and much much greedier doctors and pharmaceutical companies. The system is not perfect in Canada but it is better managed than the US system. It is destroying the competiveness of your manufacturing sector.
…I have to agree .25pt things are already too shakey. A real balancing act though. He has to slowly deflate the spending to keep inflation in check ,has to keep raising to secure foreign buyers of our debt. Inflate but not so much as to increase growth further. Lots of what if’s” As said above he has to slow the train but he’s not the one holding the steering wheel anymore. Inflated currency to pay our debts?, Kill the economy and price deflation?, Recession?, Depression? or a soft landing stagflation? ….general concensus is lower for the dollar at every turn.
which will hurt the prudent savers the most…ironic aint’ it?
We’re addicted to credit. We’re addicted to cheap oil. Breaking addictions is hard. Personally, I don’t think BB is up for it. My guess is .25 rise with lots of talk about being tough on inflation — while the printing presses continue to run.
The result will be a slow (”orderly”?) revaluation (deflation) of stocks and the dollar, continued pressure downward on housing prices, and a relatively pain free way of dealing with our huge structural debts. Until investors figure out that they’re getting screwed — and then the whole house of cards will come crashing down and everyone will look around and say “What happened? Who do we blame?”
I think you and diceman are right on. THere is really only one way out and that is a slow and measured devaluation through an inflated money supply. The alternative, and what really should be done to preserve dollar value, is unthinkable outside of the Fed. The reality is that a Volcker shock therapy just won’t work and would result in a financial melt down. I still say that is better in the long run, but Washington never thinks long term. It’s always the politically expedient choice that will dictate. While I do think the Fed is still an independent body, what the rest of Washington and all of Wall Street have done is to effectively box the Fed in. Together, Washington and Wall street have created a financial house of cards through oil dependency, outsourcing of hundreds of thousands of good paying jobs and entire industries, and the establishment of the financiers as the controlling doctrine in our economy. This leaves the Fed with only one clear choice. It’s brillian for the Wall Street - Washington complex because they get what they want for the short term and it’ll be BB holding the bag. What a perfect Washington two - step.
In think you may be right, but doesn’t this also mean that nominal prices on housing won’t fall too much? inflation and the excess liquidity causing it act like props on the nominal prices.
If houses were bought for cash, then you’d be correct. But in fact they are highly leverged…perhaps to the tune of ten times of what their prices would be unleveraged. (I say ten times as only a guess. If someone has a statistical estimate of what houses would cost without financing, I’d love to see it.) The devalued dollar will certainly work against the falling home prices, but nevertheless because home prices are the result of subtantial leveraging, they can fall far more than what a devalued dollar can do to support the price.
“In think you may be right, but doesn’t this also mean that nominal prices on housing won’t fall too much? inflation and the excess liquidity causing it act like props on the nominal prices.”
Seems like a good theory, but it would be unprecedented if it shook out like that. I’ve never heard or any financial bubble or mania that explodes 20-25% for years and then flattens out. This is the soft-landing myth perpetuated by Realtors.
There are a couple of reasons why this can’t happen. Pretty much everybody here agrees that housing has topped out and I believe this is largely because people just can’t afford anything more expensive, regardless of whatever new tricks the mortgage finance people can come up with. The problem is, everybody that bought in the last few years really couldn’t afford it without ever-increasing appreciation and lower payments on a re-fi a couple times per year. This dynamic becomes untenable in a depreciating (or even flat) housing enviornment.
The only other solution for these FB’s would be for rapidly increasing salaries to offset the lack of appreciation. I see no signs of this and Globalization will prevent it. Therefore, FB’s get squeezed harder and harder until they pop, foreclosures mount and housing crashes. There’s nothing I can see in the current macro picture that can prevent this. Ben can inflate all he likes but salaries just won’t go up that much. All that will happen is more bubble creation, more imbalances, more distortions, more systemic risk, and a possible commodity and precious metals crises.
I suggest everybody give Mish Shedlock’s blog a read:
Is the US Dollar Toast?
The argument goes that the deflationary pressures that existed in 2002-2003 are still there under the surface. When Japan raises rates at the end of the summer, a lot of the money sloshing around the world markets will drain away.
In other words, no way we get 50bps.
Here is a rebuttal to Shedlock, from the inflation side:
http://www.safehaven.com/article-5389.htm
Yes the US dollar is toast. Are you surprised? It had to happen eventually. Your country is loosing it’s manufacturing and is loosing it’s competiveness. And you live way above your means. Get rid of your McMansions and blow up your Hummers.
If the fed doesn’t start with some serious rate hikes it will end up looking like a dog that is chasing its tail. B.B. talks like he’s not worried about the twin deficits when in fact the fed policy is entirely focused on this problem. Everything else is either a symptom of this problem or a smokescreen. Even if he raises the rate .5 or more if the U.S. doesn’t get some debt forgiveness they are doomed to financial insolvency or hyperinflation. Actually it’s the same thing any way you slice it. If you really want to know if interest rates are going up keep watching if foreigners are buying U.S. debt. Foreigners are like housing bubble buyers right now. Why should they buy T-bills now when they can get a much better deal down the line?
” Foreigners are like housing bubble buyers right now. Why should they buy T-bills now when they can get a much better deal down the line? ”
They aren’t….buyers this last auction fell short again,and bonds, well…
6mo. and 30 year are inverted, say no more.
http://www.bloomberg.com/markets/rates/index.html
‘inverted’ means short term is higher than long term. It’s an indicator of a recession.
It’s not inverted, although it’s close. The fact that 30 years is so close to the short term rates means that there is ample demand for bonds.
So you have pretty much everything backwards.
It was inverted as of this past Wednesday. Then, mysteriously, the inversion ended with a selloff of long-term bonds on Thursday and Friday, accompanied by a two-day mother of a dead cat bounce in stocks…
Make that one day — Thursday, only. Weds and Fri were flat.
Rate hikes are futile. The dollar has gained against the yen, euro, and gold recently. Stronger rate hikes will put the economy in a depression and that is not good for the dollar or paying off debt.
As for the ‘foreigners won’t buy our debt’, they are currently buying long term debt at 5.00% or so. Almost as cheap as overnight rates. So obviously they are. Foreigners wouldn’t want to buy debt in a country going into a depression. It’s kind of a balancing act.
Credit is already contracting with the economy slowing and the housing sector imploding. There’s no point in making it contract even more.
Current inflation in goods is a result of too loose money years ago.
That credit is already contracting is just the point. Easy credit is still out there. Why would the creditors throw such a wide debt net if they weren’t planning for a big haul of fish. The FBs will be used to destroy a lot of the money supply by their own failure to repay. Sometimes it pays to be a small fish so you can wriggle out of the net. The fish that are fat on debt are destined for the frying pan.
The aim is to protect monetary policy. If there is even a hint of inflation the Fed will raise rates. Screw the REALTORS!!!!
Looks like Brian thinks 0% increase. Hey, good for you - you could be right, but I don’t think so. I think .5%, most here today seem to think .25% This is the type of spirited, but polite, debate that is a hallmark of Ben’s blog. It sets the bar.
if you live in a tent,rida a bike and are anorexic
inflation =3%
“Stronger rate hikes will put the economy in a depression and that is not good for the dollar or paying off debt.”
That seems to be the argument I always get from people who are in debt up to their teeth, they claim it will hurt the economy when in truth it’s their own little economy that will collapse.
Stronger rate hikes will help the dollar and give me more interest on my savings. Screw the housing and speculator side of the equation.
That’s just it… too many people (and EVERY level of government) are up to their eyeballs in debt. Collateral damage from the the housing bust will take out millions more who would’ve otherwise been fine.
It’s the US economy that’s in debt, so the “little economy” is the US’s. And no, you won’t be effected. Even if there is a depression, only people in debt will be affected. The 25% of people out of work in the great depression all were stock market gamblers.
Brianb,
Aren’t you overstating the risk of a mere .50% Fed rate hike just a tad? As another poster already mentioned, it would need to go up a full 1% just to reach the historical median, much less “overshoot”. A half-point hike –assuming the Fed is really worried about inflation (methinks it’s not)– is hardly “tough medicine” by Volker standards. 5.5% does not = financial Armageddon (unless of course you’re an over-leveraged FB who’s depending on heli-Ben to bail out your underwater a$$ at the expense of responsible savers/investors). A half-point hike doesn’t go nearly FAR ENOUGH imho, but it would certainly be a good start.
Regrettably not true. Eventually everybody will pay the price of the real estate bust. Anyways the depression did not strart on the stock market. It first started with A REAL ESTATE BUST in Florida. That’s what set off the banking crisis. And guess what? There is a real good chance that it will start the same damned way in Florida or in California. It affected ordinary people that did not have a dime in the stock market. Bust like booms are like viruses. They tend to infect everything. You should study epidemiology. It is really a lot like that.
Mish is a must read blog. Probably the best blog discussing Macroeconomic issues for the layperson. This in spite of the one point where I find it impossible to agree with him.
http://globaleconomicanalysis.blogspot.com/
Mish is convinced that we can’t have inflation in the US, which is one point he makes repeatedly that I find impossible to agree with. Mish says that we can’t have inflation because wage growth has been contained. However, we already are facing significant inflationary pressures from the liquidity that Central Banks the world over have poured into the Global Economy. Here in the US, we’ve have consumers flush with cash from HELOCs, and from abnormally low rates of interest (and sky high debt). This has fanned inflationary flames, even as wage growth has remain fairly modest.
Basically, Mish discounts the fact that asset price inflation can lead to overall price inflation.
I am not an Economist. Maybe by the textbook definition of inflation, it can’t happen without wage increases. But what we seen in the US today defies that.
goods inflation/service inflation. It is well documented that service one is more determinative ..goods come and go.
stagnant wages are one reason why the most economists don’t see inflation as a major problema..
But things could just change.
It sounds like, inherent in his argument and plausible to me, Mish concludes the tradeoff, so to speak, will be a general lowering of our standard of living. Something has to be traded away, and that could be it.
ATTN BEN; PLEASE SEE THE COVER OF TODAY’S ARIZONA REPUBLIC… RE STORY SAYS “PRICES TO COME OFF 10%…’CRISIS’ COULD LAST 6MONTHS” what a joke… 6 YEARS is more like it.
cool bring on the hikes
I think the sooner we embrace the pain the less severe the overall blow measured at the end of the cycle. I was sort of lonesome after the last hike in saying that 25 was not going to be enough, and they had to give it 50 to “re-frame” everyone’s thought processes and start towards a new, more maintainable reality.
That being said, I think the consensus of the fed is 25, because some of them are scared for all of the excellent reasons stated above.
Bond market has .25 priced in right now. I’d love .50 as it was no fun with a ton of savings earning
sub 1% for a while. But I’m patient. Get it up to
6.5% a quarter at a time if you must.
25 BP is like the frog in the water treatment. Sooner or later the frog will be BOILED. Is it now or later!!!!!
Gaming the US Ponzi Finance Masterplan:
http://www.xanga.com/russwinter
I really liked that site.
I wondre if things become as bad as we think it can, how soon after raising rates will they start lowering them again to try to help the housing bubble.
Simmssays…funny ways to freak out your date
http://www.americaninventorspot.com
This is problematic for the Fed. If everyone knew that this was the game plan, then the speculators would just hang on until it was executed, then resume business (gambling with other peoples’ money) as usual. My hunch is that this is why the Fed has traditionally gone (willfully) too far with rate hikes in the past, and is destined to do so again this round.
Don’t worry. There is no problem. Just look at this professional sign-spinner do his thang.
http://www.youtube.com/watch?v=KIQgkc8VFr4&search=sign%20spinner
Would he be doing that if there were any problem with the economy?
At least he is not unemployed, and he clearly derives nonpecuniary benefits of personal satisfaction from his work
But seriously, this human-directional phenomenon clearly indicates the gaping bubble disequilibrium between the rental and purchase markets. The markup on condo conversions is so huge that sellers can afford to employ full-time human directionals to steer traffic into the sales office, rather than rely on the traditional avenues of print or stationary-sign advertising. And as the poster suggests, it also provides clear testament to how low globalization has pushed wages for low-skilled workers — doesn’t offer much hoppe for how many FBs will be able to pay off their overpriced homes over the long run.
Another bullish contrarian signal for HB stocks?
“Housing starts
Despite the six-point drop in the home builders’ index to an 11-year low of 45 in May, most economists are forecasting a slight increase in housing starts for May. Starts are expected to rise to 1.86 million seasonally adjusted annualized units from 1.85 million in April, according to economists surveyed by MarketWatch.”
Rather like the builders are collectively shooting themselves in the foot, continuing to add new home supply to the fire of an inventory crash currently underway? This might be termed “beggar thy neighbor’s appraisal”…
http://tinyurl.com/efmvf
A hike too far?
http://tinyurl.com/hr6fw
I do think Bernake will be tough on inflation / deflation. His comments about dropping money from helicopters was in response to fighting deflation.
One question I had though, and I don’t know if anyone here can answer this without going into conspiracy theories is, how come the gov’t stopped publishing M3 numbers?
If anyone could explain the rational behind this that would be much appreciated, again I’ve heard the conspiracy theories, and I’m not buying it. Please respond if you can comment intelligently.
Thanks.
Jackie Childs
There is simply too much debt at the federal, state, corporate, and personal levels. We’ll get a few more .25 hikes (if that) and then a hold to
assess their ability to mask inflation from the masses. A big factor is what
the EU and Japan will do - if they keep raising, so will the US to stay attractive and keep the government operating. The overall impact on housing is academic at this point as we’re already heading down.
And the more you hike the interest rate, the more the debt levels zooms !
There’s no way he’ll raise it 50 bp. He’s new on the job. The course is already set and the market expects a 25 bp increase. He won’t deviate from expectations. If you think he will, short stocks the day before.
I think the answer will depend on the availability and trust in dollars. At the current time there is little foreign trust in dollars.
see http://tinyurl.com/pskox
DailyFX June 19, 2006
Brother Can You Spare a Billion?
The week ended pretty much where it started with EUR/USD posting a miniscule loss 4 basis points. The placid results however hid a fair degree of volatility in the pair as dollar bulls made a concerted effort to gun for the 1.2500 level after the “hot” PPI and CPI numbers both of which showed that inflation was inching higher than expected. The producer and consumer gauges rose 0.3% versus 0.2% at the core level. Much to the dismay of dollar bulls however, Wednesday’s CPI results actually caused a rally in the pair after a brief foray in the 1.2530 zone. Speculation ran rampant about the causes for such seemingly contradictory price action. The primary reason for Wednesday’s whipsaw was attributed to reports of a large double no touch option at the 1.25-1.30 barriers defended aggressively by the Bank of China. Whether this was true or not cannot be verified with a total certainty, however, Wednesday’s action definitely stymied dollar longs and Thursday TIC results only exacerbated their problems. As we wrote on Friday, “With TICS printing only $46.7 Billion surplus against expectations of $60 Billion the news stopped the two week dollar rally dead in its tracks. According to market experts, US needs to attract approximately $65-$70 Billion worth of capital per month in order to finance its ever burgeoning Current Account and Trade deficits. If yesterday’s report was the start of a trend rather than a one off event, the news threatens to undermine the strength of the greenback as financing difficulties will begin to trump all other considerations in the currency market, including further rate hikes by the Fed. What will be the value of highUS interest rates if US cannot attract sufficient capital to finance its deficits?”