Interest Rate Talk Likely To Begin Again

A: I hate to say it, but get ready for a whole new round of fed talk to start brewing in the blogosphere and media as inflation begins to rear its ugly head again. Even with the slowing housing market, sub prime worries, and recent stock declines that have been pricing in future risks, the fed's #1 job is to fight against inflation; and that may mean HIGHER RATES!

If I'm right, then in 4 weeks the 10YR Treasury yield will be at least 25 basis points (0.25%) higher. So, lets play a game and take a look at the 10YR Treasury Yield over the last month with the week ending yesterday:

The 10YR yield ended the week at 4.54%. If inflation fears start to come out again as I expect them to, the yield on the 10YR will be closer to 4.75% by mid April to account for the possibility of more fed rate hikes down the road.

If anything, there is NO WAY the fed will cut rates anytime soon! Not with inflation risks out there. I don't care if the economy looks like it is slowing, housing is worse than expected, or if sub-prime woes continue to get worse. If the fed ignores inflation concerns and starts targeting growth or housing woes, than we will be in for even deeper trouble down the road! There is a reason that the controllers of monetary policy has a #1 job to control inflation and pricing stability. Here is the data that I saw come in a few days ago:

Fuel, Food Prices Push Higher -

Higher gasoline and food prices pushed the cost of consumer goods up in February, according to a government report that showed inflation pressures roughly in line with Wall Street forecasts.

The Consumer Price Index, the government's main inflation gauge, climbed 0.4 percent in February, after a 0.2 percent rise in January. Economists surveyed by Briefing.com had forecast a rise of 0.3 percent.

Wholesale Prices Shoot Higher -

Wholesale prices shot higher in February, according to a government report Thursday that showed much greater inflation pressures than had been forecast.

The Producer Price Index rose 1.3 percent after a 0.6 percent decline in January. Economists surveyed by Briefing.com had forecast a 0.5 percent rise in the overall measure of prices paid by businesses.

Stocks Slump As Hopes For Rate Cut Fall -

Wall Street slumped Friday after another reading on inflation deflated hopes the Federal Reserve will start moving toward an interest rate cut when it meets next week.

Inflation concerns remained entrenched on Wall Street Friday. The Labor Department's report that its Consumer Price Index rose by 0.4 percent in February renewed some of the concerns that dogged stocks on Thursday. Wall Street had expected an increase of 0.3 percent. The rise was double that of January and the largest rise since a similar increase in December. Rising costs for gasoline, food and citrus crops helped boost prices.

So what does this all mean? Well a few things!

1. Stocks are falling due to risks to the future of US economic growth, the fact that inflation is still an issue and the fed will not be cutting rates, and housing woes.

2. Bond Yields didn't rise as much as expected given the inflation data because stocks have fallen in the past week.

3. Rates are definitely NOT going down, and in fact might be going up first.

4. If inflation remains or gets worse, rates will definitely go up and housing woes and lending issues will deepen.

Thanks to CR I noticed that Macroblog also has a take on this in their latest post titled, "The Inflation Report: Just Not Getting Better".

Lets not forget what I said back on Aug, 8 2006 when the Fed finally Paused with their slow and steady 2+ year interest rate campaign. I remember everyone already planning on early 2007 interest rate cuts and the media was all over this consensus. That lead me to say...:

A pause does NOT mean the fed is done completely! Yes, if the economy continues to slow, inflation will seem to dissipate, and the fed may have to cut rates to stimulate the economy again. But the timing of such rate cuts are probably further down the road than people think! For the short term, another future rate hike is much more certain as future inflation #'s will reflect the lagging effects of very high energy and commodities prices!

UrbanDigs Says: Keep a close eye on the 5YR & 10YR Treasury yields in the coming weeks for any signal that the street is beginning to expect a rate hike down the road. If yields start to rise, than the likelihood of higher interest rates goes up. I hope this doesn't happen but with inflation pressures not going away, we investors have to watch out for anything that might cause a change in monetary policy and plan accordingly.

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