Tuesday, June 10, 2008
Does anyone really think that the Federal Reserve is going to be raising short-term interest rates anytime soon? And if so, by anything more than some token amount that will likely have all sorts of disastrous, unexpected effects on markets?
Remember what happened with the housing market back in 2004 when former Fed chief Alan Greenspan began his "baby-steps" campaign? Well, just think how emboldened commodity traders will become when that first quarter-point rate hike comes and the price of oil doesn't drop as expected.
Does anyone really think that interest rates are going to be moving up during an election year with job losses already totaling 324,000 through just five months with what will likely be a massive downward revision to that total before November?
Dallas Fed head Richard "eighth inning" Fisher was talking yesterday like he was a cowboy about to go "round up" inflation with a big lasso.
According to this report from Bloomberg, it's not so much if or when, but how much and how fast rates will be raised.
Any move to increase interest rates to counter rising inflation pressures should be "very deliberate" and gradual, Federal Reserve Bank of Dallas President Richard Fisher said.And you don't want Fed Bank Presidents who imply something that the central bank can't deliver - after a while of talking and not delivering, people start to catch on.
"We need to proceed in a very deliberate manner and I expect us to do so,'' Fisher said in a speech today in New York. Fisher said he disagreed with the idea that "we could move less than gradually if the forces of inflation were threatening.''
The Dallas Fed chief is the only member of the Federal Open Market Committee to dissent three times this year from decisions to lower the overnight bank-lending rate, favoring either no change or less aggressive reduction. Chairman Ben S. Bernanke yesterday said policy makers will "strongly resist" any surge in inflation expectations, delivering his clearest message yet that the central bank is done lowering interest rates.
"You don't want central banks with trigger fingers," Fisher said to the Council on Foreign Relations. "One would expect gradualism."
It looks like we're in for months and months of "silly interest rate talk", a phrase that, if memory serves, Chuck Butler at Everbank coined a few years back.
If they really wanted to do something about rising prices and the plunging dollar, they'd take rates back up to at least four percent - the "official" rate of inflation. And if they were really serious about it, they'd take rates up to five percent, six percent, or more - closer to the "actual" rate of inflation.
But there's that little problems of jobs to deal with.
Now, admittedly, no one really thinks that the Bernanke Fed will wait as long as the Greenspan Fed waited to start raising interest rates back in the summer of 2004 - there was a whole year of job growth back then before short-term rates began rising and they were talking about "deflation" when home prices were rising by more than 20 percent a year in parts of the country.
That's actually very ironic - today we're talking about in-flation while home prices are dropping by more than 20 percent a year in parts of the country.
Is there some imminent reversal in the employment picture that Richard Fisher knows about that will make the current downturn the briefest of all economic slowdowns following the bursting of the biggest financial bubble in the history of the planet?
Yeah, that sounds >like< a plan.