Avert recession or control inflation?

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profette_IHB

profette_IHB

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<p>Poor Ben. Decisions, decisions...</p>

<p>"Still, rising fuel and food costs could restrain the Fed. Food prices rose 0.5 percent last month, while energy costs increased 0.3 percent. In addition, oil prices hit a record $89 a barrel on Wednesday, increasing worries that inflation will move higher and hinder economic growth..."</p>

<p><a href="http://news.yahoo.com/s/nm/20071017/bs_nm/usa_economy_dc;_ylt=Ai96C3FiTY59scfluOUW5j7v5rEF">Reuters</a></p>
 
I believe that they will put the country into a recession by raising rates......and slowing down price increases in the majority of the economy........no fed reserve board wants to be the group that puts the country into hyper inflation. Nobody wants inflation except the people that are up to their ears in dept. Old money and fixed income never want inflation and if it starts to pick up they will start screaming at the press.





I believe that most of the economists that are active in policy still remember the nightmares created by inflation back in the 70's and think that inflation is really really bad.





Besides that, I have a lot of cash that I don't want to see decrease in value.........
 
<p>Other countries are starting to bail on the US.</p>

<p>"Japan, China and Taiwan sold U.S. Treasuries at the fastest pace in at least five years in August as losses linked to U.S. subprime mortgages sparked a slump in the dollar." </p>

<p>"Asia's dumping of Treasuries exacerbated the biggest sell- off in U.S. financial assets since Russia defaulted in 1998. The dollar has declined by 7.2 percent this year to a record low against the euro as the Federal Reserve cut interest rates last month to support the housing market, reducing the yield advantage of U.S. fixed income assets. </p>

<p>``People are concerned about the U.S. dollar falling,'' said Hiromasa Nakamura, who helps oversee the equivalent of $25.7 billion at Mizuho Asset Management Co. in Tokyo. ``The Fed will continue to cut rates and the dollar may fall for three to six months.'' </p>

<p><a href="http://www.bloomberg.com/apps/news?pid=20601103&sid=aFfgx_lG6hRA">www.bloomberg.com/apps/news</a></p>

<p> </p>
 
<p>He'll continue to try and do both, until events force his hand. Which should be wehn Citigroup's SIVs have to roll over their ABCP in November.</p>

<p> </p>
 
<p>Avoid Recession.</p>

<p>Consumers are going to be spending less. The prices of the futures markets are wildly removed from the day to day spending habits of consumers.</p>
 
What I am waiting for is when are the producers going to start passing on <a href="http://tinyurl.com/2hs9be">their increased costs</a> on to the consumer. Overall PPI annualized was up 4.4% and the core was up 2%. Compared to the CPI up 2.8% and the core up 2.1%. With oil continuing to make its bull run and wages only up 1.3% I see a price inflation issue. Eventually the producers will have to pass on the increased costs.





But hey I'm just an armchair economist.
 
<p>In Greenspan's book, he forecasts the reemergence of inflation (ie. bad 70's type inflation) that might require a Volker like approach (ie. push the Fed rate way up, maybe even double digit), and pushes hard to remind people that the Fed needs to act free of govt. interference to get the job done (ie. polititians hate pushing the Fed rate way up because they get the political blame for the job losses).</p>

<p>We'll see what happens.</p>
 
graphrix:





The owner of my company was complaining about that same issue. He says that he knows inflation is a big concern (he has much the same philosophies I do on these matters), but every time he even tries to re-negotiate rates when contracts come up he gets nothing but flak.





It doesn't help that when you deal with government agencies, they use the government inflation figures to justify raises of only small percentages.
 
<i>"Which should be wehn Citigroup's SIVs have to roll over their ABCP in November."</i><p>


It may be sooner than that. Watch the news for a SIV called "Gordian Knot Sigma".
 
I have been thinking about this question for a possible blog post.





I am coming to believe mortgage interest rates must rise.





If the FED lower the funds rate further, inflation will rise which will cause banks to raise long-term interest rates on home mortgages in order to make a profit.





If the FED raises the funds rate, mortgage interest rates will rise because the spread between the two is already too low and does not reflect the appropriate risk premium.





The only scenario whereby mortgage interest rates could fall would be if all the following were true:


<ol>

if we lowered the Federal funds rate,




if central bankers around the world also lowered their rates which would prevent inflation, and




if somehow the risk premiums lenders require do not continue to rise.

</ol>

Does anyone see any flaws in my reasoning?
 
I sure hope Helicopter Ben tightens up interest rates, its way overdue. But I'm skeptical if they'll do the right thing -- exclude energy and food so we don't have inflation even though there may be $150 a barrel oil and double food costs. I'm reading Peter Schiff's book "Crash Proof" and he presents interesting cases about how the government manipulates data. <a href="http://www.europac.net">www.europac.net</a>
 
IR - It is my opinion that mortgage interest rates are not determined or influenced by the Federal Reserve. They are determined by the market, usually the US ten year treasury market. And the 10 year is way more, if not completely, influenced by the holders of that paper's faith in the USD to hold value and the ability to achieve a comparable ROI with comparable risk. I don't think the Fed lowering the Fed funds rate will influence mortgage rates in a downward direction, not do I think central bankers lowering rates will effect them.
 
IR - I just want to add my voice of support for your view (and Awgee's) about how further cuts (or even the most recent one) will impact mortgage rates. I have read Doug Kass make the same argument about inflationary pressure on 10 year TBill rates and the impact on mortgage rates.





Also, I saw something on Piggington.com last week that was incredibly well put about the impact of inflation on housing prices. While it is true that inflationary environments result in an increase in the price of physical goods, you can only expect that increase to happen to goods that weren't wildly overvalued to begin with.





No matter what happens, the direction for housing prices is clear.
 
IR - one additional comment.





You posited a scenario that could involve the Fed continuing to ease without setting off inflationary pressures that would result in an increase in mortgage rates. Disregarding the probability of that sequence of events occurring, inflation (and higher mortgage rates) is still a problem.





Look at the definition of inflation. It is a monetary illness caused by too much money in an economy chasing a static set of goods and services. This results in an increase in prices of those goods and services.





While a universal lowering of interest rates should prevent the dollar from depreciating because of rate differentials, easy money world wide is hardly a prescription to avoid inflation.





Also, another factor to consider is trade imbalances. One of the benefits of a weak dollar is that the trade deficit is starting to come down. Because the value of one currency relative to another currency is largely a function of supply and demand, the need to buy yuan, yen, euros, .... to buy goods/services from overseas with US dollars also leads to dollar depreciation. Reverse the direction of the trade imbalances, and you put pressure on the value of the dollar from a different direction.





The best thing that I can see happening for the US economy is that we come to the conclusion that all choices are bad and make the responsible choice necessary to get out of too many years of Easy Al.
 
You be spooky awgee, real spooky: <a target="_blank" href="http://online.wsj.com/article/SB119266856453862839.html?mod=googlenews_wsj">Page one of the WSJ</a>
 
Nude,





The WSJ piece was great........I have a new line......"we only provide the sandwiches...."





I honestly can't believe that these grown men, who earn hundreds of thousands of dollars, if not millions, per year have the nerve to ask the government for assistance. They are the worst form of welfare and should hang their heads in shame. As a minimum they should give up their pay checks until they can fix the mess they created.





My bet is, that we will find that there were laws broken in this little club of bankers in London. When men with no moral or ethical rudders get a hold of that much money, they always end up breaking the law. Mike Miliken, Keating, and Ken Lay are great examles of this type of personality.............send them to jail........
 
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