Wikinvest Wire

Fisher: Silly interest rate talk

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.

"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."
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.

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.

Ahhh... memories...

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.

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Anonymous said...

"Yeah, that sounds a plan."

is the word ' like ' missing from that last sentence ??

Anonymous said...

Tim, don't know if you read Jim Sinclair. Here's his latest.

There are two possibilities here:

1. Bernanke and Trichet are in the midst of a pissing contest with the US Fed not paying any attention to the financial hell they are about to release.
2. Saving face at the Fed is more important than the cost thereof.

There is only one result possible:

Any nitwit knows what happens if you increase the Discount Rate when business is accelerating its downturn.

Now what happens if the Fed does not increase rates?

Bernanke has painted himself into quite the corner.

There is absolutely no possibility on earth that the Fed can start a series of increases as that will end the financial world, not as we know it, but totally.

Tim said...

Sinclair? The Jekyll and Hyde of lucidity?

Anonymous said...

I always imagined the fed chiefs drawing lots for the dissenter role. The Fishter lost.

FWIW - I had to look up lucidity.

Anonymous said...

Jimbo knows what he is doing. How he gets to his conclusions may be unorthodox but they are largely on the mark.

Anonymous said...

Wouldn't bother me if the Fed raised rates. Something north of 8% is probably close to neutral. That would fix a lot of the crap going in in a hurry. Wouldn't bother me if the Fed dropped rates to zero. Got enough PM and hard asset exposure to weather the inflation. It's basically like Jim Rogers said, the Fed has become irrelevant.

crimson ghost said...

Moderately higher interest rates could be bullish at this juncture IF they triggered a sharp drop in oil prices.

Anonymous said...

"One would expect gradualism." You mean gradual as in taking rates down 300 bps over a 7 month span. Oh yeah, I forgot down doesn't count. If that wasn't a happy trigger finger I don't know what is.

This is the most obvious bluff in the history of monetary policy. One that the energy markets seem intent on calling.

Anonymous said...

Looks like the tail trying to wag the dog. Yields on the short end have spiked HUGE in the last couple days. The market is forcing the Fed higher but the heads want you to think they are still in control.

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