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Which way next for short-term rates?
Monday, August 11, 2008
All the talk earlier this year about the Federal Reserve raising interest rates in the second half has proven to be just that - talk - and a few lone voices are now being heard predicting the next move to be down, not up. If the current economic slowdown is anything like the last one, rates will move down further before it's over.
With energy prices now plunging, before you know it we may even have another "deflation" scare to make the current economic slowdown even more interesting, in which case, slashing rates to zero sometime in the next year or two could be a real possibility.
Two years into the slowdown last time around, as rates were about to be reduced from 1.25 percent to an even 1.0, home prices were rising at 6-8-10 percent a year making the "deflation" claim laughable in retrospect.
This time, it may be the real thing.
2 comments:
There will never, ever be a general deflation of the dollar.
Not if rates go to 20% again. Remember how your dollars bought more in 1982?
Our predicament today is more like Japan in 1990 than any other I can think of. We have a government intent on propping up faulty assets, through the myriad of policies like allowing investment banks to use questionable assets as collateral with the Fed; orchestrating the takeover of questionable businesses ie BSC, CFC, and, the latitude given FNM and FRE with reserves, to name just a few. This will merely serve to put off the day of reckoning, and lead to deflation as banks are too busy fighting for survival to entertain lending.
As well, their is no argument to be made for raising rates. What purpose would that serve? Do we need to reign in runaway growth, wage inflation or an easy money policy? Not at all. There is commodity inflation, but that is typically self-correcting as we are now witnessing. The only reason to raise rates would be to strengthen the dollar. But, that would hurt our exports, the one bright spot in our economy; as well it would further strain the already stressed banks.
Nope. I see deflation coming, and you are going to see rates lower than anyone could imagine. Additionally, in today's investing climate where is all the money going to flow? In the 90's it was in the dot.coms; then into real estate; then into commodities. Next will be fixed income. In inflationary times your yields are reduced; in deflationary times they are increased.
Look for rates in the next couple of years to come down below levels witnessed in well over 50 years. Buy long Treasuries. Deflation is coming.
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