Posted on 05/10/2006 12:06:52 PM PDT by Moonman62
Every time they signal they might stop raising rates, the dollar drops against other currencies. And to keep the T-bill market going, they have to not drop rates.
They are between a rock and a hard place. Rate increases hurt the housing sector. Without rate increases, foreign investment dries up.
Glad I ain't a banker.
The government doesnt determine anything as far as interest rates. The FDIC does. Check on it. Its a few banks setting the rates for the currency and all Congress does is go along.
Indeed.
That was objective, well written and true.
That's what Volcker did, but the other way to save the dollar is to let the economy grow and restrain government growth.
However, in a rational sence, they are controlling the Economy so as to smooth out the Highs and Lows (the Amplitude of the Waves).
I respectfully disagree. Have you ever heard of pilot induced oscillations or Edward Deming? Trying to control a variable, especially without enough information, leads to larger oscillations in the variable.
It isn't and isn't supposed to be. There is a valid reason to increase the money supply to keep prices from deflating. The problem is Presidents like to have dollar policies, usually weak ones, and the Fed usually accomodates that. The Fed also doesn't believe in market signals like the yield curve, so they move rates around until they break something or they hit a nice round number.
Because they have Phd's, and they are given wide lattitude to make mistakes by the government. They don't get paid for being right, and get their rewards by being powerful and shoveling manure instead.
Yes, the money supply is expanding, but so are deflationary forces throughout the globe. It's impossible to keep track of it all. Thus market signals need to be used. Commodities are a legitimate signal, but one must account for all the reasons why they are going up. It's just not money supply. The yield curve indicated that the Fed should have stopped raising rates awhile back.
Indeed. I received an email from a Fed watcher this morning and he said the very same; the Fed would have to raise rates to preserve the risk premium in short and mid-term bonds and to prop up the dollar.
I will say that their full comments were not as hawkish as he predicted they would be...might be they know they're at the end of the string.
Excellent observation. They also decide to stop on a round number. Another clue that they are clueless, but well educated, and never held accountable.
It's one way, but the best way is to let the economy grow while restraining government growth.
...agreed, and well written!
The other day they signalled they would keep raising rates and the dollar still dropped.
And to keep the T-bill market going, they have to not drop rates.
The best way to keep that market going would be for the government to stop issuing so much debt.
They are between a rock and a hard place. Rate increases hurt the housing sector.
Yes.
Without rate increases, foreign investment dries up.
Domestic investment is far more important. Slowing down economic growth with rate increases hurts domestic investment. We need to restrain government growth, and let the economy grow.
Glad I ain't a banker.
Why not? Have you checked their stocl prices? They've learned to adapt to a rising rate environment.
Bernanke said that was just one thing he looked at and he's right. The low long term yields don't necessarily indicate low inflation or deflation expectations. Often long term rates fall just because of anticipation of falling short term rates. Anyway, the world is awash in long term money as well as Fannie Mae, GM and other had incentive to borrow short and lend long. That incentive will undoubtedly come back as the Fed caves to political pressures and lowers short term rates. As for deflation, what I see mostly is a huge glut of Chinese and now Vietnamese and other manufacturing undercutting each other.
And in recent weeks he's said that the yield curve doesn't matter. He's reasoning is that absolute rates are historically low. He is speaking as an elitist who thinks he is smarter than the markets. The yield curve is an indicator of how much the Fed is manipulating the market, not absolute rates.
Your reasoning makes more sense. But one should note that the global markets, as they adopt technology and their markets grow, they are going to give us many opportunities to import deflation. The yield curve should not be dismissed on a gut feeling as Greenspan and just about every Fed chairman has done. It is still the best predictor of recession.
I agree with your 'disagreement': The very act of intervening in the system may have unforseen results. For example, [IMHO] Greenspan brought on the 'Crash of 1987' by his continued raising of interest rates in an effort to supposedly 'control inflation'. The Market got spooked, sell programs kicked in, everyone jumped for the 'exits' at once, and there was a massive downdraft in the market.
Nonetheless, the Fed does it because it can. In saying this I ascribe no 'right' or 'wrong' to my original answer. This is merely the explanation I'm sure you would get if you were to ask anyone, or that I remember from my undergraduate year of Macro- & Micro-Economic Theory.
".... It's one way, but the best way is to let the economy grow while restraining government growth....."
I agree 100%.
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