Are Markets Telling The Fed To Stop?
A: Back to some macro talk and what the fed may do in its upcoming meetings. When the fed made its aggressive 50 basis point cut in both the target rate and the discount window a few weeks ago, did they do the bulk of the intended actions in that one move? It's a very interesting question and a perspective that may provide some clues as to how bad our fed thinks the overall economy is likely to get hit! Here is what I'm thinking.
It's clear the fed chose to target economic growth prospects over inflation and a weakening US dollar when it acted back on Sept 18th. Given the moderation of inflation in some flawed datasets, they had the luxury of doing this at the expense of increased risks to higher inflation in the pipeline. The fed also knows that a rate move takes time to have an effect on the economy. Is it possible they did the bulk of their intended actions in that one shot, as the currency and commodities markets NOW ARE TELLING THEM to take it easy with future moves?
Take a look at what the US Dollar, the price of Gold, and the price of Oil have done since the fed cut rates and rallied the equity markets.
US DOLLAR vs EURO ---> Lost Value; Went From $1.38 to $1.42 to now buy 1 EURO
OIL PRICE PER BARREL ---> Surged Higher; $77/Barrel to over $83/Barrel today
PRICE OF GOLD (ounce) ---> Surged Higher; $711/oz to over $745/oz today
Whether or not these are inter-related is under debate but one thing is perfectly clear. Add all these moves together and there is a COMBINED EFFORT TO TELL THE FED TO TAKE IT REAL EASY WITH FUTURE RATE CUTS!
The fed acted as a preventative measure to cushion any blow to the economy and at the same time added additional liquidity and plenty of confidence to the credit markets. The price to pay for this medicine is a buildup of inflationary pressures in the pipeline (that means down the road people, not now!). We are going to see a RISE in inflationary measures in the years to come; and that makes me believe that rates in the longer run will have to trend higher AFTER this credit blip plays out. The inflationary markets are telling the fed to stop!
The fed knows this! It's not like they have no idea how low our currency is falling or how high oil prices are. So, IF they decide to cut (and we probably have another one or two 1/4 point cuts at the MOST), that tells me that there is a real concern about slowing US economic growth for the near term. No way they risk future problems with inflation unless there are big problems heading our way! Honestly, I think we have 1 more 1/4 rate ease ahead of us and thats it; if it's more, I'm getting short some stock as the fed aggressively tries to prevent the shit from hitting the proverbial fan. The stock market right now is acting on future rate cut expectations, strong global growth, weaker dollar to pump up profits, and inflation readings as a measure of strong economic growth, at the same time that the fed seems to be on its side to cure the credit illness that may pop up!
Let's see if:
* a rising stock market to near record highs
* a fast falling US dollar
* record high oil prices
* surging gold prices
* jobs data not as bad as expected
...join together to put an early end to this Fed easing cycle! Am I alone in this train of thought? I know inflation is not a bad thing when resulting from strong economic growth, but at what point does inflation move past the good/bad point and become a graver threat to future growth?
Barry Ritholtz Doesn't Believe in Core Data & Has Inflation Concerns
Professor Nouriel Roubini Thinks the US Economy is Done
Robert Reich Thinks The Weak Dollar is Making Us Poorer
Many out there are just not interested in this stuff and are utterly clueless. Here is what worries me as I hope this is an isolated incident: I had a conversation with a client the other day who sincerely thought the fed has 6-7 more rate cuts coming and that mortgage rates are headed back down to 5% for a 30YR Fixed, that rate cuts mean nothing about where the economy is, and that due to this housing will surge in the next year or so.
For those that read my stuff, you can imagine how red my faced turned! I went home, opened up a bottle of Oban, and let the scotch take the shakes out of me.
PS: I talk about this because if inflation proves to become a problem, rates will be heading higher in the longer term and that means the cost of credit will as well. Needless to say, it's a macro fundamental that I feel worth watching and more important for future investments is what our monetary setting policymakers do about it!
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Comments (2)
Lets hope it will not be STAGFLATION
Posted by Ronen | September 28, 2007 3:19 PM
I certainly hope not! What is a fed to do it that situation?
Posted by Noah | September 28, 2007 3:35 PM