Friday, September 22, 2006

Fed Reserve is Trapped

The Federal Reserve Board decided to leave rates unchanged at 5.25%. This was the second meeting in a row where they decided to pause.

Reasons To Raise Rates:
  • Inflation Worries. As "readings on core inflation have been elevated, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures."
  • Attract Inflow of Foreign Capitol.
Reasons To Lower Rates:
  • Recession Fears "The moderation in economic growth appears to be continuing"
  • Don't want to cause a meltdown in the housing market. As there is already "a cooling of the housing market.
The Federal Reserve Board is trapped. They are in a very tough position. I don't blame Ben Bernanke as it was Al Greenspan who created this conundrum.

18 comments:

  1. Ah, the perils of central banking.

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  2. I agree with the this "trapped Scenario." The bond market is already pricing in a cut as the next more. However, I think that defending the dollar is a big issue. Perhaps when the cuts really start the bond yields will be stable or start moving up due to sharp declines in the dollar. It will make no sense for foreigners to hold dollars based assets.

    Bill

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  3. The irony is that there is a growing body of thought that deflation/stagflation is the real concern - not inflation.

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  4. The Feds will lower the rates soon enough. Likely sometime next spring. The powers that be DO NOT want to see a housing meltdown.

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  5. Greenspan really bleeped up his legacy, though I blame 9-11 for a big piece of it.

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  6. My bet: Bernanke will keep the rates stable. We are in an election year and the incumbent party (Republicans) will put pressure on the White House and the White House, in turn, will "ask" the Fed to keep rates stable for now.

    BTW...You wonder why gas prices are falling nationally two months before Congressional elections?

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  7. anonymous 7:30 said,

    "The Feds will lower the rates soon enough. Likely sometime next spring. The powers that be DO NOT want to see a housing meltdown."

    You may be right. But, as in all price bubbles, price deflation is unavoidable no matter what the powers that be want. They may forestall the inevitable -- and, hence, make it worse -- but they can't avoid it.

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  8. >The Feds will lower the rates soon enough. Likely sometime next spring. The powers that be DO NOT want to see a housing meltdown.

    Housing will melt, until the bulk of the exotic mortgages has reset and it is clear who is still standing and who is foreclosed upon. That should be in 2009. The FED can do nothing about it, except starting a hyperinflation that will make real estate valuable as wealth storage but destroys any future power of the FED.

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  9. fed is powerless! raise rates and the "slow" implosions of the housing market becomes a complete collapse. raise rates and foreign buyers of our paper (t notes and bonds to the tune of THREE BILLION A DAY) stop buying and the dollar collapses..any way you cut it this is a perfect storm for disaster..

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  10. Its a big game of Jenga, and the fed wants to skip a turn.

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  11. I don't know that pointing to 9-11 is
    accurate. I remember the stock market in free fall before that event , and the markets reversed not too long after. Yes, there was a recession due to the economic events prior to 9-11,but not after.

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  12. Heh. If they had real control over oil prices, gas would be twenty-five cents a gallon by the middle of October. I am delighted that the CB is having mercy on the housing market. With a solid underlying economy, this bubble doesn't have to crash and burn like the last two. Clearly commodities were fueling inflation concerns, productivity can only do so much to offset briskly rising costs. But commodities are backing off for now.

    Two major hedge funds going over the cliff has to have the speculators worried. I would be. The majority of hedge fund participants are new to the game. Just like new condo flippers, they haven't seen the dark side. So the hedgies don't have as much eager money as they did, and there are rumors of sizable withdrawls from many funds. And the Japanese have cut off the free money for now.

    Most importantly for oil prices, I just bought a hybrid, so down goes crude.

    When a market, any market is going up, it feels like it will go up forever. When a market, any market is going down, it feels like it will do so forever. Neither is true.

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  13. fogcutter said:
    "When a market, any market is going up, it feels like it will go up forever. When a market, any market is going down, it feels like it will do so forever. Neither is true."

    Very well thought out post!

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  14. commodity price increases DO NOT FUEL inflation. inflation is strictly a monetary phenomena. too many dollars chasing too few goods. the central banks create inflation. the only way to control it is to stop the monetary printing presses. this bubble will crash and burn to a far greater degree than the stock market bubbles (which are still in full force).

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  15. All Bullshit..... Take your beating now, or else the beating you get down the road will hurt much more!

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  16. Our Fearless Leaders were very much afraid after 9-11. The stock market had tanked to epic proportions, and the towers falling really rattled the economy.

    The government only has 3 real tools that affect the economy: Taxes, Spending, and the Fed Rate.

    To gin things up they used all three, and the future be danged. They cut taxes, increased Federal spending, and slashed interest rates. Even that held no promise of a good outcome, but that was all they had.

    Visions of Hoover were dancing around the great halls. A depression, once started, is very hard to reverse. WWII got us out of the last one.

    All the loose credit including the prostitution of exotic mortages pulled us back from the abyss, but now look at what we have. Most home owners will be fine, many won't be.

    Sacrifice of the few to save the many? Well, I don't have any exotic loans and I sold near the peak, so I am cool, but I have friends who have just started bleeding out of their eyes, and the real pain hasn't started yet.

    Here we have heros and villians drinking from the same cup, or something like that.

    Lereah has no soul.

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  17. fogcutter said:
    "Sacrifice of the few to save the many? Well, I don't have any exotic loans and I sold near the peak, so I am cool, but I have friends who have just started bleeding out of their eyes, and the real pain hasn't started yet."

    You also don't have a roof over your head that isn't subject to the vagueries of inflation/the economy ... or the whims of a landlord. In brief, you have no "safe harbor", you've left yourself exposed in regards to one of the most fundamental needs of mankind ... Where you're going to live. Good luck. Hopefully (for you), your doomesday prophecy won't come to be ... as you'll be the first to suffer.

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  18. Although prices continue to decline - and will continue further - good deals will always be good deals - creative mortgage financing allows for the average American to achieve "the dream"

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