Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Earlie who wrote (36804)	9/9/2005 12:30:01 PM
From: Knighty Tin	Respond to of 116555

We know how screwed up Canada is, so what does that say about the USA? <G>

To: Earlie who wrote (36804)	9/9/2005 5:07:29 PM
From: Crimson Ghost	Read Replies (1) \| Respond to of 116555

If the Fed Stops Pushing, Might Bond Yields Rise?: Chet Currier Sept. 9 (Bloomberg) -- Should the aftermath of Hurricane Katrina deter the Federal Reserve from raising short-term interest rates this month, an odd thing might happen. The bond market could at last give us some of the higher longer- term interest rates that the Fed has been trying without success to promote since the middle of last year. While the central bank's next move is the subject of much debate, the disaster in four southern states has clearly altered the calculations it must make in setting monetary policy. After more than a year of uninterrupted increases in short-term rates, ``the Fed will probably stop a little bit short of where they would have because of Katrina,'' Bill Gross, chief investment officer at Pacific Investment Management Co. and manager of the biggest of all bond funds, said in an interview this week. Since June 30, 2004, the Fed has steadily increased the overnight bank rate in quarter-point increments to 3.5 percent from 1 percent. Yet at recent levels of about 4.1 percent, the yield on 10-year Treasury notes stands almost half a percentage point below where it was at mid-2004. With the devastation inflicted by Katrina, Fed policy makers face pressure from Congress, among other places, to hold off on the next quarter-point increase in money rates -- which until the hurricane struck was projected for Sept. 20 by all 81 economists surveyed by Bloomberg News. Tough Choice Some say the Fed will put economics ahead of politics and keep raising rates; others say the situation is simply too grim in human terms for that. Whatever the central bank does, there is likely to be a response from bond traders as well as political commentators. If the Fed decides to stand pat, it might intensify concern about inflation in the bond market, and prompt a drop in bond prices and a rise in bond yields. The reasoning goes like this: Until now, with its steady barrage of rate increases, the Fed has been taking steps to counter whatever inflationary impulses might be stirring in a surprisingly vibrant economy. If the central bank strays even temporarily from that mission, bond investors might decide they needed to take up the cudgels themselves. ``Going into the end of August, the U.S. economy was expanding at about a 4 percent rate by our measures,'' said Jason Rotenberg, an analyst at Bridgewater Associates Inc., the largest U.S. hedge fund manager by assets, in a commentary this week. ``There was no longer any slack in the economy. Inflation was at 3 percent and rising.'' Question Marks In this setting, ``current yields of slightly higher than 4 percent don't make much sense to us,'' Rotenberg said. ``U.S. credit markets are underestimating inflationary pressures -- both cyclical and related to rising commodity prices -- and overestimating the likely economic impact of the hurricane.'' The after-effects of Katrina are a study in short-term uncertainty, says David Kelly, economic adviser at mutual-fund manager Putnam Investments in Boston. ``Katrina will raise inflation and cut profits, but only for a short period of time,'' Kelly says. ``On balance, it will hurt economic growth also, but we still cannot tell with assurance by how much.'' ``This uncertainty alone may be enough to cause the Federal Reserve to pause in its monetary tightening when it meets on Sept. 20,'' he says. ``If it does so, however, this should only be a temporary pause. When the U.S. economy has shaken off Katrina's effects, the Fed will not want to maintain an overly easy monetary policy.'' Contrary And yet -- wouldn't Fed policy makers be interested to see any sort of rise in long-term interest rates that might accompany its pause? If one primary object of its policy lately has been to cool the housing market and other economic hot spots stoked by easy money, the Fed ought to be happy to see higher bond rates working toward that end. If the Fed does pause, whether sooner or later, it would be entirely in character for the bond market to decide it was time for some rate increases of its own. Bond traders have demonstrated their contrariness over the last 15 months, refusing to raise long-term rates on demand. That makes them just the sort to deliver higher rates once they were no longer being pushed.