Thursday, February 28, 2008

Major Themes continue

Gold and Oil continue up and weakness in Financials continue.

I think the trend in Gold will continue until the Fed reverses there position on interest rates. Maybe I'm missing something here, but I see inflation as a bigger problem right now than trying to maintain growth in the US by cutting interest rates. Bernanke said he cut rates to help restore confidence in the financial institutions. On January 21st, I probably would have done the same. However, I think the belief that the Fed is going to keep cutting rates and keep them down isn't going to play out for very long. Bernanke and company are smart guys, and the blame shouldn't be put on them. I agree with the senators complimenting Bernanke on being sincere in his statements and being straightforward in his remarks. It's interesting to note that one of the senators asked Bernanke today if he thought that reducing interest rates would help the economy and housing market. Mortgage rates are still high even though short term bond yields have come down. The idea of cutting interest rates to in effect lower mortgage rates and help boost buying in homes hasn't worked thus far.

While short term bond yields are lower, the long term bond yields haven't come down very far in comparison. It has been noted that any further interest rate cuts would in effect put the real rate negative when adjusted for the the current inflation rate. Bernanke is hoping inflation will stabilize and come down in the future and I think that as soon as inflation indicators (Oil,commodities) come down that the Fed may increase interest rates again, which would hopefully help the US dollar. The next FOMC meeting is going to be huge IMO, and I think there is potential for a sharp reversal in all markets shortly there after on what further actions the Fed takes after the next meeting.

5yr vs 30yr


tapeworm on 11:23 AM said...

yep...i'm not an economist, but its not hard to tell that inflation exists...i was a kid during the 70's, but i even remember hearing people talk about how bad things were...i don't think its a coincidence that he says he doesn't care about inflation, and commodities break out to new highs

then again, what do i know?!?

eddie on 10:11 AM said...

I just came across your blog. Please explain to me, a newbie, how short term and long term bond yeilds are affected by the cutting of the itnerest rate, and why any more cutting of interest rates would make the real rate negative, what does this mean? Why do you think bernanke will raise interest rates as soon as he thinks inflation stabilizes. My logic tells me he needs to raise them now to head of inflation. I appreciate any explanation I can get. thanks

HPT on 9:37 PM said...

Short term bond yields have a high correlation with the fed fund rate and trade lower when the fed cuts rates. When I said that the real rate may go negative, I was referring to the fed funds rate. If the fed drops the rate another 100bp to 2%, that in effect would be negative for the US, because inflation in the US should be accounted for. Our inflation rate is around 3% right now.

I think bernanke needs to stop cutting rates. This will in effect restore some support in the US dollar, which in effect should force some selling in commodities and lower inflation and solve the problem. Cutting rates is not the answer, its what the Media has been pumping as what is needed right now to solve the credit mess. In the short term, maybe, but a year from now I expect things will be different. I'm not an economics major, this is just my opinion on the subject right now.

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