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Why the Fed Didn't Raise Interest Rates

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  • Why the Fed Didn't Raise Interest Rates



    Why the Fed Didn't Raise Interest Rates
    March 21, 2007 (Peter Coy - BusinessWeek)

    Inflation is running above the levels that Bernanke has targeted, but he's holding off on hiking rates because of the risks

    Imagine you're driving a car with a blacked-out windshield and a loose steering wheel. Now imagine that your car is the $13 trillion U.S. economy. That should give you some idea of what it feels like to be Federal Reserve Chairman Ben S. Bernanke. Yes, in a word: scary.

    AntiSpin: That's close to last night's opinion of the iTulip ShadowFed. The Fed wants to cut, because of the ongoing collapse of the housing market and attendant negative wealth effects on consumption. Inflation data–such as it is, without either M3 or recent 30-year bond auction prices to better inform the markets of long term inflation risks–shows inflation running hot, and all eyes on the dollar, as the entire planet is now waiting to see if the U.S. will default on its more than $8 trillion foreign debt via inflation. So, the Fed has to wait. We describe it as the "Fly around in the fog until you hit something, then cut rates" policy.

    The FOMC did what the ShadowFed expected, but now what it recommended. The advice from our board was a tougher stance on inflation. We didn't get that, and the dollar took it in the shorts.
    Dollar At 2-Year Low Vs Euro As Fed Softens Tone
    March 21, 2007 (Dow Jones)

    The dollar sank to a two-year low against the euro Wednesday after the Federal Reserve softened its rate tightening bias and backpeddled from previous upbeat comments on growth and inflation.

    Gold shot up as the dollar weakened. The stock market rallied because... well, never mind the stock market. Mostly companies themselves are buyers (pdf).

    If you are a financial writer in another country, what are you making of all this?

    The US Economy: Dangerously Sick
    March 21, 2007 (Zaman Today)

    Normally I devote my column to an in-depth analysis of the Turkish economy in order to inform my readers, mostly foreigners, about the risks and opportunities of our economy. However, it is becoming increasingly obvious that instead of talking about domestic risk factors, we must concentrate on external ones, mainly stemming from the US economy.

    Even if economists are, nowadays, talking about Chinese stock market fluctuations and their impact on the rest of the word, I think this is just a pseudo agenda, hiding the most threatening and impending agenda: the American disease.

    To refresh your memory, on Jan. 31, 2007 the president of the United States gave his speech on the “State of the Economy” citing strong economic growth, record Dow Jones performance and low unemployment rates. Despite this seemingly rosy picture based on some selective figures, today we are talking about the fundamental deficiencies of the US economy as a major source of global instability in the world economy.

    Previously supportive foreign financial press are starting to call the U.S. economy "dangerous." How about the thought leaders among the U.S. financial press?
    Once Again, Debt Is Miscast as the Villain
    March 21, 2007 (New York Times)

    The mortgage boom of the last few years wasn’t an isolated phenomenon. It was instead the newest way for consumers to go into debt. The small consumer loan of the Jenkses’ day begot the installment loan, which begot the credit card and eventually the interest-only adjustable-rate mortgage. Now, a lot of people are saying that the economy is finally going to pay the price for its spendthrift ways.

    Which, when you stop and think about it, is roughly the same warning we have been hearing since at least 1912.

    [Blah, blah, blah...]

    The solution will have to involve new guidelines, voluntary or government-imposed, that force lenders to be clearer about the terms they’re offering borrowers. But as long as we take tough measures to clean up the mess, we’ll end up with a healthier mortgage market than we had beforehand. And then we can go looking for the next form of debt to captivate and torment us.

    According to the NYTimes, the deflating housing bubble and soon to be collapsing consumer credit market are mere growing pains of the latest new-fangled form of credit: mortgage debt. In fact, the only thing new about this episode is the forgotten lesson of what happens when too many people take on too much of it on the assumption that asset prices and incomes will continue to rise forever. The NYT writer skips over at least one major event of the credit cycle which has occurred since 1912: The Great Depression.
    Consumers' borrowing is one of the most conspicuous danger points in the secondary phenomena of prosperity, and consumers' debts are among the most conspicuous weak spots in recession and depression.

    In other words, we shall readily understand why the load of debt thus light heartedly incurred by people who foresaw nothing but booms should become a serious matter whenever incomes fell, and that construction would then contribute, directly and through the effects on the credit structure of impaired values of real estate, as much to a depression as it had contributed to the preceding booms. Nothing is so likely to produce cumulative depressive processes as such commitments of a vast number of households to an overhead financed to a great extent by commercial banks.

    But under the circumstances of the 1920s boom and in the glow of its uncritical optimism, neither costs nor interest charges mattered much. It seemed more important to get quickly the home one wanted–or the skyscraper the prospective rents of which in any case compared favorably with the rare on mortgage bonds–than to bother whether it would cost a few thousand dollars–or in the case of the skyscraper, a million or so–more or less, provided money was readily forthcoming at those rates. And it was. First mortgages on urban real estate represent, on the one hand, not all the loans that were made available for building and, on the other hand, also financed not only other types of building but other things than building. But it is still permissible to point to the fact that they increased from, roughly, 13 billion in 1922 to, roughly, 27 in 1929... This increase is out of all proportion, not only with the increase in what can in any reasonable sense be called savings, but also with the expansion of bank credit in other lines of business, and illustrates well how a cheap money policy may affect other sectors than those in which it is conspicuously successful in bringing down rates.

    - Joseph A. Schumpeter, "Business Cycles," 1939

    Such quaint numbers, 13 billion and 27 billion. What might Schumpeter make of this?

    Last edited by FRED; 03-22-07, 07:51 AM.

  • #2
    Re: Why the Fed Didn't Raise Interest Rate

    If the US consumer debt bubble finally pops, and lenders really tighten, could this potentially cause a deflationary recession due to a contraction in the 70% of GDP that is consumption?

    -Josh

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    • #3
      Re: Why the Fed Didn't Raise Interest Rates

      http://video.google.com/videoplay?do...35140271687860

      Comment


      • #4
        Re: Why the Fed Didn't Raise Interest Rates

        Sitting here after a good night's sleep relaxed on the Lake of Zürich (webcam): The current stock price hike after the announcement of the FED that there is no news - even worse - playing down the current events in the housing market - is nothing less than a sucker rallye in a bearish enviromment, or in other words, again a good time to sell. Indications? Rather fundamental - this is where the forum is mostly about here - and technically speaking some major resitances above the current advances.

        Technically speaking, the Dow has had three or more days of good advances now, propelling him now near the 68% return between the last high and the last low, so showing a typical Fibonacci curve. Interestingly enough, this is also the crossing of the 38 day moving average. So a setback is inevitably to be expected within the upcoming days which then might lead to further declines, subsequently.

        Along with that and already meantioned by EJ, the US-Dollar has fallen astronomically within milliseconds after the Fed has announced its nonsense statement, moving the EUR/USD pairing to as high as 1.3408 USD for one Euro or more than one US-Cent higher, to a level not seen since the end of 2004, clearly being a sign of an increased lack of confidence into the interest policymaking of the fed by interenational traders.

        In other words, from a European perspective, the recent gains of the Dow have virtually vaporised in currency declines, again, or to put it into this perspective, any recent investment into US shares is not paying really at all, currency-adjusted.

        To make it worse, the last 10 days, the Dow has not improved in Gold Terms, within three months, the DOW has declined by 4%, within six months by 7% and within 12 months by 11% and - to top the story - within five years of Dow advances since the lows of 2002 - a Gold-adjusted Dow has declined by a whopping 50%!! Real value creation did not exist - the opposite: an investment into the Dow - not even speaking of the broader and less advancing S&P 500, has destroyed significant value in real, inflation-adjusted terms not only recently but the last five consecutive years!

        And this is the most alarming part of the story.
        Last edited by Christoph von Gamm; 03-22-07, 02:43 AM.
        Christoph von Gamm
        http://www.interenterprise.eu - with Queer-O-Pinion!

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        • #5
          Re: Why the Fed Didn't Raise Interest Rates

          which is not the case with european markets : they shoot up as weel and in euros ! no vaporisation ....a sing of a deconnection between the US economy and the european economies ?

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          • #6
            Re: Why the Fed Didn't Raise Interest Rates

            I'd say they have taken the NYSE as the benchmark in terms of price increases and also followed this technical reaction but did not factor in the implication of a change in EUR/USD. The markets are overall closely connected, by all means, which does not imply there would not be disparities and differences which can be used and leveraged for investing.
            Christoph von Gamm
            http://www.interenterprise.eu - with Queer-O-Pinion!

            Comment


            • #7
              Re: Why the Fed Didn't Raise Interest Rates

              The initial claims data is not pre-recessionary, and hasn't been for a while. Before a recession starts initial claims data upticks meaningfully.

              The "Wall" that was supposed to hit stocks is almost fully trampled over by bulls.

              ECRI's leading indicators ar ticking up now, too.

              It's looking more and more like no recession in 07.

              This continues to be the "coming recession", not the recession.
              check out the charts at blog.myspace.com/dannycharts

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              • #8
                Re: Why the Fed Didn't Raise Interest Rates

                DanielLCharts - in my view employment data is a confirming trailing indicator - means: when the recession has arrived and says hello to us, then the jobs are gone. First there are no sales with companies, then they sack the people, resulting that a couple of weeks later you see the initial claims going up. Latency matters here...
                Last edited by Christoph von Gamm; 03-22-07, 10:19 AM.
                Christoph von Gamm
                http://www.interenterprise.eu - with Queer-O-Pinion!

                Comment


                • #9
                  Re: Why the Fed Didn't Raise Interest Rates

                  Originally posted by EJ
                  Inflation is running above the levels that Bernanke has targeted, but he's holding off on hiking rates because of the risks
                  LMAO, there is only one number Benboy looks at regarding inflation and it has nothing to do with the rising cost of goods, assets and services. Gentle Ben only cares about rising wages for the cows in this debtors prison. When you consider that the Fed allowed conngress to jack up the federal minimum wage, certainly Bernie has no concerns about rising wages.
                  "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."
                  - Charles Mackay

                  Comment


                  • #10
                    Compelling!!!

                    The piece you link to via
                    companies themselves are buyers (pdf)
                    under the heading “Stock buying” is COMPELLING!!!

                    “In the past three years, and particularly during 2006, stock markets have been pushed up by large scale buying from companies. In the US, they have been virtually the only major class of [net] buyer. Individuals, both directly and via mutual funds, have been large [net] sellers, ...”

                    Assuming this true (it was news to me), ‘everybody’ should be aware of it!!! Judgement of companies’ performance is commonly share price dependent! So, we have ‘large scale buying from companies’ as a great candidate for great artificiality UPWARDS of share prices.

                    Comment


                    • #11
                      Re: Why the Fed Didn't Raise Interest Rates

                      EJ: "... all eyes on the dollar, as the entire planet is now waiting to see if the U.S. will default on its more than $8 trillion foreign debt via inflation."

                      Many people expect this outcome. Who knows; perhaps they will be right. But here's what I don't get about that scenario: what then? That "solution" might be OK if we never had to borrow another dollar afterwards. But as far as I can tell, for well into the foreseeable future our debt MUST be sold. So what happens after such a default? Does the US simply become a "sub-prime borrower", paying hefty third world type interest rates to foreign creditors; assuming we can get anyone to lend to us at all?

                      Comment


                      • #12
                        Re: Why the Fed Didn't Raise Interest Rates

                        Originally posted by EJ
                        ...
                        Inflation data–such as it is, without either M3
                        ...

                        Fearless leader... *gasp*... :eek: :confused:

                        Your very own chela does M3 (as does John Williams at shadowstats.com):



                        ;)
                        http://www.NowAndTheFuture.com

                        Comment


                        • #13
                          Re: Why the Fed Didn't Raise Interest Rates

                          Originally posted by Pilot Fish
                          EJ: "... all eyes on the dollar, as the entire planet is now waiting to see if the U.S. will default on its more than $8 trillion foreign debt via inflation."

                          Many people expect this outcome. Who knows; perhaps they will be right. But here's what I don't get about that scenario: what then? That "solution" might be OK if we never had to borrow another dollar afterwards. But as far as I can tell, for well into the foreseeable future our debt MUST be sold. So what happens after such a default? Does the US simply become a "sub-prime borrower", paying hefty third world type interest rates to foreign creditors; assuming we can get anyone to lend to us at all?
                          How possibly can there ever be a default? The Federal Reserve itself is the buyer of last resort. How can the agency constitutionally in charge of monies creation our conngress ever not have the money to service the debt? No money to service the debt implies there is not enough money. The only difference here would be money issued by the Treasury as in Treasury Notes or money issued by the Federal Reserve.

                          End result here is that rates still have further to fall.
                          "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."
                          - Charles Mackay

                          Comment


                          • #14
                            Re: Why the Fed Didn't Raise Interest Rates

                            Nice thread men, keep up the good work .:cool:
                            I one day will run with the big dogs in the world currency markets, and stick it to the man

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                            • #15
                              Re: Why the Fed Didn't Raise Interest Rates

                              Originally posted by Pilot Fish
                              EJ: "... all eyes on the dollar, as the entire planet is now waiting to see if the U.S. will default on its more than $8 trillion foreign debt via inflation."

                              Many people expect this outcome. Who knows; perhaps they will be right. But here's what I don't get about that scenario: what then? That "solution" might be OK if we never had to borrow another dollar afterwards. But as far as I can tell, for well into the foreseeable future our debt MUST be sold. So what happens after such a default? Does the US simply become a "sub-prime borrower", paying hefty third world type interest rates to foreign creditors; assuming we can get anyone to lend to us at all?
                              Supporting the dollar by purchases of new U.S. debt has become the Hot Potato of global central banking. Each time the U.S. Debt Hot Potato is tossed by the current holder, a new holder has to be ready to catch and hold it, at least for a while, or all of the holders of existing U.S. debt will suffer a depreciation of reserves. So it gets tossed from one unhappy holder to the next... from Japan, to China, to oil producers, perhaps back to Japan again, for decades. The latest holder is a political not an economic arrangement. Perhaps alternative arrangements are being made, such as a floating tariff, so that some day no one has to hold to U.S. Debt Hot Potato, or maybe a mis-step or miscommunication occurs in the next hand-off and the Hot Potato gets dropped on the ground.
                              Last edited by EJ; 03-22-07, 04:15 PM.

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