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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: koan who wrote (80837)6/29/2008 8:00:31 PM
From: Dan3  Read Replies (3) of 116555
 
What happens if Bernanke (some time in the next couple of weeks) raises rates?

Bernanke may have been acting wildly lately, but he's not stupid. Clearly inflation and expectations of inflation are rising very rapidly with the result, among other things, that actual interest rates paid by borrowers are rising (look at mortgage and commercial loan rates) even as the Fed drops rates.

That's also had the effect of crashing the dollar which raises dollar denominated prices for things like oil and food.

So he calls a press conference, announces that the stimulus checks have done their job, personal income and spending are back on track, and that the forces that led to fed to reduce rates are now under control.

He then raises the Fed two rates by 0.5% (not enough to have any real effect, but enough to show he's not just blowing smoke).

I think that there's a good chance that:

Mid and long term bond prices would rise (leading to lower rates for mortgages).

The dollar would jump (leading to dramatically lower oil/gasoline prices).

And the market might well go up. (I'm less confident on that one, other than a relief rally based on a very sincere sounding "it's OK now" from the Fed).

Does any of this make sense? It would represent a serious risk for anyone who's short.
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