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Strategies & Market Trends : Heinz Blasnik- Views You Can Use -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (2885)	7/1/2003 10:28:19 AM
From: LLCF	Read Replies (1) \| Respond to of 4907

<Jim Grant always says the Fed can either fix the rate, or fix the money supply, but not both at the same time. > Right... if you want the rate down 50bps you can't quibble about how much money you lend. I think she means that in the long run the fed may be forced to simply backpeddle and raise rates if other market participants demand more and more and more. You could argue they [Volker] were forced to raise rates before too. Of course that would assume they see some evil [inflation?] that makes them decide sitting their pumping out more is not a good idea. DAK

To: Wyätt Gwyön who wrote (2885)	7/1/2003 12:25:51 PM
From: GraceZ	Read Replies (1) \| Respond to of 4907

In the past they were always fixing in a demand regime. We have a supply regime which means that at every price level marginal supply exceeds marginal demand. They've lost control if they ever had it. At this point no one knows where the market would fix the rate because we haven't had anything like a free market in money since 1993, but the vestiges of a free market assert themselves and it shows up in the rate rising or falling away from the target. In a demand regime the rate would need to be defended with RPs because it would rise above the target. Recently it has intermittently fallen away from the target and the Fed has had to defend it by doing RRPs whereas in the past they were able to fine tune it by shortening the term of the RPs. This has been happening for a while and they reluctantly followed it down by lowering the rate yet again. I think the Fed would be a lot happier if it was in a position where it had to raise rates. This is similar but the reverse of what happened in the 1970s. They kept rates too low for too long out of fear that they'd kill off an already dead economy even though it was clear that the money they created was propping prices more than the economy. When they finally started to raise the rate it didn't kill off rising prices it just added fuel to the fire, at every level the market adapted to the higher rate and speculation in hard assets increased every single time they raised. It was the opposite of what we see now in that it was a demand regime where demand exceeded supply at every single level, how ever tight they got it was never tight enough. Meanwhile they almost killed off the real economy with the death spiral of rising prices and interest rates. They had little choice but to completely give up interest rate targeting because when the Fed would enter the market the traders would head for the bathroom. Unfortunately they forgot this lesson.