This morning, there was a curious little headline on WSJ.com:
U.S. companies are racing to issue new bonds out of concern that a surging economy will push interest rates higher next year.
At the same time, it reported:
The ECB kept interest rates steady at 2%, as inflation risks in the euro-zone economy remain low. The Bank of England left its rates unchanged at 3.75%.
I don't know about you, but I see inflation all around me; however, the government has engineered the statistic to exclude anything that a real person uses in real life, so officially, there is no inflation. My cynical view is that it's probably another way to hold down all pension benefits that are indexed to "inflation".
Next year is an election year, and the Fed will avoid raising rates close to the election itself since they don't want to appear to be influencing voters. This leaves it two alternatives: do nothing, or raise rates early in the year.
We've been assured by a parade of FOMC officials that rates are going to stay low, so here is what we think will come to pass. Without an official rate hike, the Dollar will be weak, but don't forget market forces. For all we know, the FOMC will follow it's tried and true formula of letting the market make major interest rate decisions as Treasury bond and note prices yo-yo in the open market.
We've done our work on the big picture and for Treasuries. If rates start to move, we don't expect the FOMC to do anything other than to maybe follow suit as a last resort. The bottom line is that they learned from Paul Volker that they can definitely kill inflation with higher rates, while the Bank of Japan demonstrated that interest rates are ineffective in stimulating recovery. If you have to place a bet like Alan Greenspan, it's certainly understandable why one would prefer to err on the side of inflation, particularly when you know that market forces will raise rates for you beforehand.03.12.04 10:21 #