Mon 7 Aug 2006
It seems like everything I’ve read in the last couple days has focused on whether or not the Fed will raise rates or pause at Tuesday’s meeting. Will Helicopter Ben show up, or the Inflation Targeter that he more tended to portray while in academia. The rate futures have a 25% probability of a hike in August, and about 50/50 for September.
There is the added dimension of what commentary accompanies the actual interest rate. If they raise rates but say, “this is the last one” many people will be excited. If they don’t raise rates but say, “we’re definately raising rates in September” excitement will be mixed…
And one more monkey wrench to toss in — what has the market already priced in? If everyone thinks they’re not raising rates (as evidenced by the futures probability) not raising rates may cause the market to go down (buy the rumor, sell the news).
So, with all this anticipation and second guessing Ben, the commentary, the markets… does it matter?
More important than correctly predicting the rate change decision is properly being prepared for either scenario. It is not very wise to convince yourself that there is only one possible outcome and leave yourself vulnerable to the chance of being wrong – regardless of what the probabilities are. Murphy’s law would apply – if something can go wrong it probably will.
I believe rates will go up, but I don’t have any special inside information as to why. I think the Fed has shown us in the past that they go further than most market participants think they should. I think the Fed is targeting asset prices even though they say they’re not. They face the tradeoff of stopping excessive speculation now or a year from now — the pain now is much more tolerable than a year from now (politically as well as economically). I believe the Fed is willing to risk a recession, and being able to stop inflation now avoids a potentailly Volker-like situation from being necessary.
Of course, that’s just what I believe. I’m not positioning my investments or speculations to depend on a rate hike to be successful.? And if I were, I would certainly make sure I knew how to get out of a position with only a small loss if I find out I’m wrong.
August 8th, 2006 at 8:45 am
My take is less short term: I see the Fed increasing rates by 50 basis points by the end of the year, and whether they do it in August or Sept doesn’t really matter so much to me since I’ve already taken action (my controversial bond move) based on the larger fact that the Fed is near the peak of the rate hikes. “Near the peak” was enough for me to act and start getting into position. Before this is all over with I may end up quadrupling my initial bond position.
The argument over whether the Fed will raise or not raise at the next meeting is starting to feel like people are missing the big picture. If the Fed is slowing or stopping, then the music has already stopped and anyone who’s left dancing at the equities club needs to open their eyes and realize that it’s getting late and all the cool kids have left the party. I agree that the Fed is willing to risk a recession or at least a significant economic slow down (I wonder what the sacrifice ratio is right now…). With the knowledge that the Fed is willing to inflict that upon us, it seems very worrisome that the Fed is also seeming to pause or stop raising rates. Doesn’t that imply to you that the damage has already been inflicted and we just aren’t yet fully aware of it yet?
Is it strange to think that if the market doesn’t go down 10% or more that the Fed won’t get the message that they have raised rates far enough? Doesn’t the market need to cry unkle for the Fed to stop? In other words, the Fed wants rates to be as high as the market can bear since higher rates by default put a downward pressure on inflation. If the Fed thought they could get away with a 200 basis point increase tomorrow and the market and economy wouldn’t mind, they would certainly do it in a heartbeat. The rate is their main weapon, and they are going to lock and load it just as much as the market can handle it so they’ll have sufficient ammunition, both as a deterent against inflations and as a weapon should the economy weaken.