More terrific comments from Jim Bianco to add to those made by Noland and Fleckenstein. Notice JB reference to my "Pinocchio effect" everytime the MoP opens their mouths.
"John, I said IF April's non-farm payroll report is greater than 200,000 (released May 7), the Fed will have no choice but to go. I reasoned that if they do not hike on June 30 (again in the wake of another strong payroll report), the CRB will top 300, gold will make new highs, the dollar will resume its downward trend and long-term interest rates will continue to soar (as they have since April 2). Further all these trends will continue until the Fed does raise rates.
"I suggested June as the Fed does not want to become part of the election rhetoric. Nothing short of a full-blown crisis will get them to do anything at the September meeting. They would prefer to do nothing at the August meeting. So, it's June or next year.
"Right now the July fed fund futures is putting the odds of a June 30 hike near 40%. One more strong payroll report SHOULD push the odds above 50%. This is why I'm looking at June 30. The track record of this contract looking out less than 3 months is pretty good.
"1% is an emergency rate set in the wake of September 11 and the Iraq war. The Fed reasoned the economy was in serious trouble because of these two events. The Fed was wrong. The economy is booming (6+% real GDP 2h 2003) and the consensus is expecting 5+% real GDP in Q1 2004. A year ago the economy was losing over 100,000 jobs a months. In the first three month of 2004, its been adding 171,000. Quite a turnaround.
"Its time for the Fed to move from accommodative to neutral. Right now, my reading of the "Taylor Rule" suggests "neutral" is near 4%! The current policy has created a substantial inflation worry (CRB, Gold, TIPS breakeven inflation rates at 5 year highs) and now when we have a significant bottom in core CPI fueling this worry. Friday, Al Broaddus said the Fed can continue "Patience" and suggested they need more evidence of inflation to hike rates. My sense is the marketplace is close to "losing patience" with the Fed. The marketplace sees inflation. The marketplace has been asking the Fed to move to "neutral" for months. The Fed is not listening! At some point happy talk about inflation will be viewed as just talk to justify a bad policy and add $10 to gold (or 10 points to the CRB) every time they suggest inflation is not a problem.
"IF we get more strong economic numbers, the markets will riot if the Fed doesn't take its foot off the gas. If the Fed does not move sooner (i.e., June), the market will worry the Fed is "locked out" until after the election. This means inflation, and leveraged speculation in the bond market will run unchecked for months. Leveraged speculation, I might add, that has been largely caused by 1% funds and statements like "considerable period" and "patience." - JB |
