I simply don’t know how all this 50 basis point chatter got started and pinged around Wal Street like its a likely option.

Hell, why only 50 ? Why not 100, if the economy is so damn strong?

Let’s open up a thread on this: 

Does anyone think that much besides a 1/4 point is in the cards tomorrow? Major language change? And what might Mr. Market have to say about all this.

Discuss:

Category: Federal Reserve

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

67 Responses to “1/4 point, or . . . ?”

  1. mike says:

    I’ve been “calling for” 50bp increases for 6 months (ie, that’s what I’d like to see) but I certainly don’t exped the fed to think as boldly as me… I think they’re confused as to whether fighting apparent inflation now will require fighting deflation later. Go ahead, and flame me, but the impending real estate hard-landing in CA has serious enough implications that I think all markets (equity, interest rate and commodities) are confused as to the outcome 1 yr out. What to be long, what to be short, if your horizon extends more than 6-9 months?

  2. Bruce Sherman says:

    I can’t imagine that the Fed will go higher than a quarter point increase tomorrow. Bernanke doesn’t want to shock the market and some of the Fed governors are concerned about raising rates too high (although I would argue that they already have).

    There’s no reason for a half point increase tomorrow when they can simply raise the Fed funds rate by a quarter point and state that future increases will be data dependent.

    The big risk, in my opinion, is that the data coming in before the August meeting compels them to raise rates yet again in August. That would not be helpful heading into the always precarious September/October period (which may be even more volatile this year due to the uncertainty surrounding the elections and which party will control Congress).

    Moreover, given the delayed impact of interest rate increases, the Fed might find in late ’06 or early ’07 that the economy is slowing rapidly and that rates are far too high.

    At that point, it is too late and a recession is a real possibility.

    And that’s not even considering geo-political risks.

    Bruce Sherman

  3. me2200 says:

    I call 50 basis points and no hint of stopping.

    Why ? Inflation is ACCELERATING. The hikes that have been done this far haven’t slowed it at all. That requires an accelerating rate increase.

    The market will sell off.

    I’m sitting in 100% cash. I made 4% in oils in the last week. I’m up 5% over my May 10th totals.

    Lets see what you are made of, Ben ! Lets have it.

  4. M.Z. Forrest says:

    I speculate it will be 50 basis points, because I think the Fed is looking for an excuse to pause. There are elections coming in October. Additionally I think there is concern about appreciation against the Euro and particularly the Yen. We’ve actually seen trade deficit narrow a little bit the last 3 months. The problem with 25 basis points is that the next meeting is up in the air unless they declare there won’t be another increase. 50 gives the Fed time. I think they want that.

  5. me2200 says:

    We will see at least 50 bps between the June and August meetings.

    I say at least because if you haven’t noticed, copper is still at $3+, oil is at $72 today and nothing is slowing down. The housing numbers were stronger than forecast this week.

    2 months is too long to leave things run. 25 bps will show that Bernanke is soft and it will take 2 months to see if he has the backbone to really get in front of inflation. So it will be 50 bps tomorrow. Things need to slow down. Oil will feed through to inflation, it is just a matter of time. Go look at the inflation numbers for the 1970s. It takes a few years. Inflation has a head of steam already and it needs to be fought.

    And don’t expect him to say we are done either. He might say he expects 50 BPS to contain it, but we will still be data dependent. Bernanke can’t and won’t say he is done until we get inflation under 3%.

    Some people are saying that BB has targets. I think he does and I think they are 1.5-2.5%. 3% is too much.

    BTW: 1 in 6 think 50 bps is in the works.
    http://post.polls.yahoo.com/quiz/financeresults.php

  6. jkw says:

    I believe that the 1/2 point talk is based on the idea that the Fed needs to shock liquidity out of the system. They need to do something to stop the speculators. The higher they raise rates, the harder housing will crash. If they shock the markets, they don’t need to go as high. But if they shock the market too much, they will be blamed for any problems that come up in the near future. Going up 100bp tomorrow would cause a huge selloff in everything. It could crash some market or the dollar.

    I don’t see any need for them to go up by a multiple of 25bp. If they go up 35 or 40, it will still shock the markets but won’t leave rates quite as high.

    Is it normal for 1-6 month treasuries to get below the Fed Funds rate? Why would anyone be willing to lend money at a rate below the overnight rate they can pretty much be guaranteed to get? I can understand long bonds inverting if people expect rates to drop in the future, but I don’t see how anyone can seriously believe that the Fed Funds rate will be below 5 anytime in the next 3 months. Why aren’t banks doing the arbitrage of shorting short-term treasuries and lending the money in the Fed Funds market?

  7. me2200 says:

    “I can’t imagine that the Fed will go higher than a quarter point increase tomorrow. Bernanke doesn’t want to shock the market”

    Man, I just gotta comment on this… this market has been “one and done” for about a year now.

    What are they thinking ? Oil has to get south of $50 for it not to be a risk to inflation. House prices are holding, not falling. Copper is $3. TIPS are still running 250+ bps. Rent is rising.

    We need to understand something: for the last 5 or more years, the interest rates have been artificially low. That is ending. All the excess economic stimulus is ending. Sure it would be nice to keep the interest rate at 5%. But guess what: I don’t think it can be done without creating bubbles. When the interest rate is at 5%, Joe consumer can borrow way too much money and things get out of control, ala dot com and now housing.

    So… we are headed back to the good ole days of mortgage rates of 8 to 10%. Inflation is easy to contain then and the economy is strong enough to handle it after a period of adjustment.

  8. me2200 says:

    I agree with the 35 or 40 bps idea. It doesn’t have to be 50. But it won’t be 25. And he won’t say they are pausing or stopping. It will remain data dependent.

    GREAT DISCUSSION, guys. I didn’t know that anyone other than me thought that 25 bps would OK.

  9. Pilot Fish says:

    Frankly, I’m more interested in what Japan does next month. If Japan does raise their rates, I wouldn’t necessarily expect an immediate, dramatic sell-off since this may have been priced in to some extent (but I could be wrong). However, they do seem to “flinch” every time the markets react poorly to any serious tightening efforts on their part. So if they were to hold off on an increase, I could see where that might unleash the speculators again – at least for a while.

  10. me2200 says:

    I don’t get where the talk about a stop come from ! The ONLY thing I can see getting hurt by the rates thus far are the gold traders. The market sold off, sure, but that is just because everyone thought we were done. WRONG.

    Corporate mergers are now starting to get very rich. There is still a lot of money sloshing around.

    Commodity prices are creeping into things. One of the tire manufacturers said they were really feeling commodity prices.

  11. me2200 says:

    If we are in year 4 of a 20 year commodity bull cycle, isn’t Bernanke going to have to do something to tame the demand for commodities ?

    Quite frankly, I think that is what is behind all the recent tightening. CBs can see what is going on and the mess it will lead to if they don’t all do something. I suspect that BB is getting pressure from other CBs to work in unison with them, especially since we are big time consumers.

    Wasn’t there a big CB meeting not too long ago ?

  12. M.Z. Forrest says:

    me2200,

    I don’t think the fed can afford to be aggressive. If the dollar starts significantly regaining from its five year declines against the Euro and Yen, traffic won’t move in Long Beach due to all of the shipping containers coming off. Boeing and other shops have benefited tremendously against the declining dollar.

  13. VL says:

    The Fed is behind the curve and they will need at least 50 basis points in the near future to catch up and obtain control over the inflation, but I do not think we will see 50 basis points tomorrow unless the latest core PCE deflator is high (The Fed will know this data tomorrow but we will find out about the core PCE deflator on Friday)
    Most likely we will see 25 basis points tomorrow and another 25 in August. Even though 50 basis points is less likely; nevertheless, it is possible if the latest core PCE deflator is high.

  14. sell_the_ten_year says:

    Kudlow is the one who started this 50bp talk. Remember his little birdie that told him the Fed isn’t afraid to “shock the market.”

    It doesn’t matter, the Fed has lost control of inflation. Oil touched 72.70 today, less than 4% off the nominal all-time high. Someone is desperately refusing to let gold push above $600.

    Aggressive Keynesian fiscal stimulus in the form of some new foreign policy adventures is the only feasible plan for keeping this thing together.

    Notice the escalation of tensions in the Near East. IDF back in Gaza. IAF buzzing Assad’s palace today. Could be a hot summer.

    BR is only CNBC commentator I know of with the courage to point out how this recovery has been largely based on war spending. It’s amazing he is still allowed on the air.

  15. trader75 says:

    If oil at $70 is inflationary, does that mean oil at $140 is twice as inflationary?

    A wee bit of sarcasm there.

    Point being, what about the high cost of energy as a drag on economic activity? We’ve been able to suck it up until now, but we’ve also been in a housing-boom, wealth-effect, sea-of-liquidity environment up til now.

    The disconnect is that inflation / deflation risks aren’t linear. If / when consumer spending slows to a critical point, we could transition from an inflationary environment to a deflationary one rather quickly.

    And aren’t all these rich corporate mergers more a lagging, rather than a leading, indicator? All that cash was already accumulated in a highly profitable environment that no longer exists.

    Flashy displays based on yesterday’s gains don’t say much about the deteriorating conditions of the current environment. If the consumer is going into the tank, corporate profits will likely follow.

    It would be interesting to review Bernanke’s comments before he turned into superhawk (the ‘Neville Chamberlain’ phase). If I recall correctly, he was of the opinion that pending economic slowdown warranted caution–and may still believe it.

  16. whipsaw says:

    My personal guess is that we’ll see the expected 25 point increase and nothing new as far as policy language goes. They certainly aren’t going to announce what will happen in August since that depends on what happens in July, etc.

    I don’t know what the market reaction will be in any case, but would lean towards the idea that this week will close with a rally that sputters along until the NFP next week when everything tanks nicely. I’ll buy SPY puts somewhere along the line, but it looks like they aren’t going to get cheap again like I had hoped. bah.

  17. BDG123 says:

    50bps? Keeeeeeeerist! Ain’t no way. None. Zero. Nada. Zilch. I’ll eat my hat.

    It got started from the release of the minutes from the last meeting where an FOMC member wondered out loud if they should increase by 50bps. That was a warning to fast money driving commodities and likely planted. ie, Discussed before the meeting to be entered into the minutes to shake the traders driving commodities. It’s called good cop, bad cop and it’s likely a little bit of salesmanship. The FOMC wants to sell Wall Street on their inflationary hawkishness without having to kill the economy to prove it. (It happened at the exact same time margin requirements were raised on the NYMEX. Gee, what a coincidence.)

    THE PRIME RATE IS 8%. You think you can get a loan for 5%? How about Prime+2 IFFF you have great credit? Rates are already at 8 to 10%.

    The Fed likely already has killed the economy. Much of everything that will likely unfold is very laaaaagging. If a slow down isn’t imminent, it would be a miracle. It’s worth pausing to see because now the rate hikes could be pounding the economy with a sledgehammer. Let’s see data flow in over the next six months. If we aren’t at negative GDP growth by EOY I’ll be surprised. Oil? It isn’t driven off of fundamentals. And, you watch it drop at the first sign of a significant slowing. The Fed doesn’t need to target commodities and Bernanke has written historically that he does not believe in such action. So, that would mean he is changing his beliefs? I don’t think so. You will not find an economist anywhere on plane earth who will tell you inflation is sustainable without wage inflation. I’m not talking about the type of inflation that is always in the system. Our system is built on some inflation. I’m talking runaway inflation. WITHOUT MORE MONEY IN THE CONSUMER’S POCKET, PRICING PASSTHROUGH IS NOT SUSTAINABLE AND WILL ULTIMATELY YIELD A SELF FULFILLING OUTCOME OF A SLOW DOWN and an abatement of inflationary pressures. Why has it taken hold in input prices this cycle? Excess liquidity. If housing prices drop, so will all input pressures from commodities. We MUST see wages start to increase for housing to stay elevated and inflation to take hold beyond this business cycle. May happen but there’s a valid argument it won’t if we are already five years into this economic cycle

    Housing is not just going to collapse. It isn’t a highly liquid market like stocks where prices fall 30% in a month. But, with the supply imbalances, history says they will drop and drop hard in certain areas. Does anyone here drive looking out the windshield? Because your economics are through the rearview mirror. You should all apply for a job at the Federal Reserve. You’d fit right in. The time for aggressive hikes was before the imbalances became extreme. Not now that they are and the economy is teetering on the precipice.

  18. Fred says:

    A quarter point and a cloud of dust.

  19. Craig H says:

    I thought it was the bulls who wanted 50bp on the premise that the Fed (at least under Easy Al) used to end a tightening cycle with “50bp and done”? It’s supposed to be some kind of crescendo and an all-clear signal to take stocks higher. That’s my interpretation of Kudlow’s wet dream.

    If I were Bernanke I’d do exactly the same as the last time: 25bp and the same exact statement. Keep hiking, keep them guessing that there’s more to come, and show them that he’s not going to be pushed around by any pundits in the media or salesmen at the brokerages.

    So when they think of him flying around in a helicopter, they won’t picture him in a Jet Ranger dropping sacks of cash on “Easy Street”, but prowling around in a gunship shooting speculators.

    Oh the easy-money crowd and the salesmen will cry and whine about him all right; they’ll fear his next move and voice their worries about August on CNBC, but they’ll respect him a little bit more in the morning.

  20. rob says:

    the Fed will pause. no hike.

  21. VJ says:

    The Fed Funds Rate will continue with it’s “Groundhog Day” increases, just as with the previous sixteen increases. Quarter point, quarter point, quarter point….
    .

  22. Sammy20 says:

    My bet is they will do 25 just as they have been and keep the language the same and we will be doing this same guessing game in August….as long as they keep this going eventually the slowing economy will leave them no choice in the markets eyes (which I think they might welcome) but to pause.

    I also can’t believe how people are now considering increments other than 25 and 50bps. This is getting out of control. Do we really think 5bps more or less is going to do anything….haha.

    2 points:
    1) Mets looked bad tonight…Someone needs to hit Lastings some fungos prior to the game.

    2) I thought Cody was only rude to u Barry, but it turns out he interupts everyone w/ a differing opinion…and I find it bothersome that the guy criticises everyone bearish and talks about how “cheap” techs are yet claims to be only in cash and some MSFT…oh yeah, and now some Apple….unless of course Apple continues to plunge, then he will somehow claim he is 100% cash again.

  23. bobby says:

    I like Jim Sinclair’s comments:

    http://www.jsmineset.com

  24. qw says:

    It will be 25 with very little change in language.

    Its clear that me2200 wants interest so high that the economy will crater by the positions he has staked out. Wanting something to happen has no impact on whether or not it does.

    Mortgages at up to 10%. Please. Not for a very long time. We will go through a cycle of easing again long before mortgages reach 10%.

    Mortgages haven’t been 10% for 20 years.

  25. RB says:

    It will be 25bps. ECRI-FIG which has a lead time of 9 months peaked October of last year. Greenspan called it one of his favorites. We will see inflation numbers (at least the official ones) turn down August or thereafter.
    On the other hand, the rate hikes could always have a hysterical finish.

  26. bam says:

    6% by the end of the year. How they get there is anyone’s guess — but they need to get to 6. Why? Continued govt spending while Japan talks about raising the bar. Watch for China to revalue the yuan in response to increases; they have no choice as we ratchet up rates. We may be caught in a vicious circle having to raise rates in response to the yuan’s revalue. Rough weather ahead.

  27. Alex says:

    It will be 25 basis points, but I am sure the Fed appreciates the rumor mongering of a 50 basis point increase. Mr. Bernanke needs to shoot his bullets quite carefully now. He is near or at neutral, according to previous statements from the Fed. More importantly, he will stick with his transparent policy, and a larger rise would be a sucker punch.

    We have five more meetings for the year, counting the one in session. So the real red hot question is which one will be the first resulting in a pause. I know inflation is a problem, but I seriously cannot believe he will raise to 6.25% by year end. But I must say, I will believe he will pause when he does.

  28. dryfly says:

    Sign me up for a nutha 25.

    The Kudlow 50 talk was to frame expectations then see the market be pleasantly ‘surprised’ when expectations are exceeded. Typical Larry.

  29. me2200 says:

    It is true my position is set for a 50 basis point hike, but I’m not sure there won’t be a sell off if we 25 bps and tough talk. I think the market is expecting 25 an done.

    It is true that the indicators we see are lagging. But it is also true that expectations are foreward looking. People with inflation expectations expect things to go up in the future.

    It certainly is possible to have inflation without wage growth IN THE USA. Wage growth in other countries will do it and as far as I can tell, the US hikes are part of a larger picture.

    Its true that the housing wealth effect has fed inflation. That is why we have inflation without wage growth. We had wealth effect in the place of wage growth. Can’t everyone see that ? Wealth effect, or more importantly home equity loans, took the place of wage growth. That is what fueled it all.

    As far as I can tell, we’ll have wealth effect from housing until house prices decline 20%. If they stay where they are, people will sell and cash out 20% gains over the last year and their spending will fuel inflationary spending.

    We also have to keep in mind that we have a ton of war spending.

    There is another issue here: the US has to keep the dollar high to avoid inflation from rising import prices.

    I still say 50 basis points. I could have positioned my portfolio for anything. I chose 50 basis points or 25 and tough language with another 25 in August, because I think we are behind the curve with inflation, I think BB sees it, and I think he is going to act.

    Tomorrow will be very interesting.

    Next question… how does the market react ? Is say -5% on the major indicies if we get 25 bps and tough talk. I say -10% if we get 50 bps. I say flat if we get 25 bps and soft talk.

  30. Hunter says:

    Good analysis me2200. I think the markets will not completely tank if only if ol’ Ben does a 50 bump and promises they will pause after (-2% to -5%). I think the markets will be relieved of a finite end more than anything. However I think that is 3 meetings from now. This is how I see it going down for the rest of the year with a 25-25-50-pause. Ending the year at 6% is where I see it. For the one and done crowd it aint happening unless Ben finishes w/ a fifty….

  31. ilsm says:

    Basis point hardly matter.

    The Central Bank of the People’s Republic has more power in this economy than the fed.

    I would do 50 and tell Bush to cut the deficit.

    Or, another 50 in August.

  32. Will Geisdorf says:

    I believe we see 25 basis points and a statement similar to the one released with the last quarter-point hike. If we get that combined with a strong CPI number out of Japan tonight, it could be a bloody Friday for global markets with precious metals and Emerging Markets making another leg lower.

  33. royce says:

    Put me down for 25 and the same “we’re watching data” language. Now who is holding the money for the pool?

  34. vf says:

    i don’t understand why economists and pundits are ready to discount the rise in owner eq rent in the CPI as a reason not to keep raising rates but didn’t the cite the fall in this variable as a reason to keep rates abnormally low for 2 years.. infuriating

    this is why the Fed is becoming less significant.. i find it ironic that this meeting is carrying so much weight yet there is so much uncertainty around what they will do and say.. my bet is a non-event…
    the dollar and yield curve will do what they need to do and stocks are at the mercy of those markets

  35. Jack says:

    Polls suggest a recession is imminent in 2007 even without a 25 or 50 bp increase. The US dollar is down around 30% over the past 5 years, even as we near the end of the rate hikes. We are fighting a losing battle to strengthen our currency.

    The time of easy money from the housing market is over. It was the refinancing that created the temporary wealth, and now that price increases have abated and rates are higher, it is now time to pay the piper. Even if you sell for a 20% gain, you still have to find another place to live, or pay taxes.

    I think inflation will persist no matter what the fed does. What needs to happen is the govt cuts spending, raises taxes and reduces the deficit.

  36. David Yaseen says:

    I’m guessing 50 bp and ambiguous language. My bet is Bernanke and his ego are determined to show the market that they’re tough enough for the job. Current inflation numbers give him cover for this.

    As an afterthought, though, concerns about the market will temper the language of the statement, rendering it opaque.

    Ultimately, I’m with those who believe that prevailing rates will be set by the market, and Ben isn’t going to have a lot of input on the issue going forward.

  37. kevinmr says:

    25 bps and a neutral statement.

    Aftrer 17 ups it is human nature to want to pause and survey the results.

    Mr. Market sells off because deep down it knows inflation is an issue whether the Fed raises 25 or 50 bps.

  38. waterboy says:

    The Committee judges that some further policy firming may (keyword) ‘still’ yet be needed to address inflation risks…

  39. Tim says:

    25 pts – no chance in language, but no hike in August either. Inflation is a l a g g i n g indicator.

    I think they already went too far. It will take 6-9 months to see it (read “it” = consumer spending), but RE has already jumped the shark.

  40. Andy says:

    1/4 pt. now, 1/4 in August, and maybe another 1/4 pt in Sept. and the market falls off a cliff, because the inversion will be at least 25 pts by then and liquidity is being drained from the system as we speak….

  41. GDP at 5.6%? CPI above 3%? 100 basis points and pause.

  42. me2200 says:

    I’m watching cnbc and it sounds like a broken record. Everyone is calling for 25 + pause.

    Is that wishful thinking, again ? Are all these people in denial, again ?

  43. Alaskan Pete says:

    +25, no change in language. Pause at next meeting.

  44. jcf says:

    25bp+ & virtually same language. Being between a rock and a hard spot, this is most predictable and least likely to cause seismic damage.

  45. PeterB says:

    I believe the 50bp speculation got started when Henry Kaufman discussed this in a recent interview with Kathleen Hays. At least, that’s where I first saw it.

    Kaufman’s basic point was that the credit markets have been responding in anticipation to the Fed’s measured increases, which has tended to nullify the intent of the increases. Kaufman believes the credit markets need an unexpected jolt to force them to change their wicked ways — a 50bp hike, for example.

    Kaufman also called for rates rising to 6% before all is said and done.

  46. craigk says:

    inflation inflation inflation . . . yes, prices are up but beyond the control of the Fed. raising interest rates won’t affect the price of oil or taxes . . . the cost of government is big part of the cost of living. what we need is a little less government in our lives.

  47. Ironman says:

    If we go by the recession prediction model published by the Fed earlier this year, the current spread between the 10-Year (5.21%) and 3-Month (4.85%) Treasuries, increasing the Federal Funds Rate (FFR) to 5.25% will keep the probability of recession occurring in the next 12 months at 27%. (Do the math yourself here.)

    That would be certainly be fully consistent with the level of recession probability for the last 3 Fed hikes.

    But, this time around, the Fed has more room to maneuver since the spread between the 10-Year and 3-Month Treasuries has been widening. If they increase the FFR to 5.5%, the odds of recession increase to just 30% – not that much different. This would allow them to get more of a jump on inflation with less risk to the economy, allowing them potentially more flexibility with adjusting rates later in the current cycle.

    Side note: at a FFR of 5.25%, it would take an inverted yield curve of -.44% (difference between yield of the 10-Year and 3-Month Treasuries) to increase the probability of recession to 50% in the next 12 months. At 5.5%, an inverted yield curve of -.32% would the same odds of recession.

  48. VL says:

    It is amazing how not so good news from Japan today, as Japan’s industrial production falls 1% and it becomes least likely now that Japan will be eager to hike their rates in July, have spiked commodity prices. It seems the Fed (and what it does) is not so important for speculators than BOJ. It appears that for the speculators / manipulators the borrowing of cheap money from Japan, in order to corner global commodity markets, squeezing shorts and driving up prices, is main component of their excessive speculative trading and cornering commodity markets tricks. (They perform most of their commodity cornering through China and Russia, so it appears as China is buying all these commodities like crazy but in reality the large part of it is market cornering to drive up the prices. You can call me crazy but I know one Russian hedge fund based in London doing this with metals and as long as they can borrow funds from Japan at nearly 0% the commodity prices will remain high.)

  49. STS says:

    So 25 bps it is!
    http://www.federalreserve.gov/boarddocs/press/monetary/2006/20060629/

    Language looks similar to last time.

  50. me2200 says:

    I WAS WRONG.

  51. ndk says:

    Toothless.

  52. trader75 says:

    The disconnect is that inflation / deflation risks aren’t linear. If / when consumer spending slows to a critical point, we could transition from an inflationary environment to a deflationary one rather quickly.

    Shazam. The artist-formerly-known-as-B and I wuz right. That whole superhawk gig was hung around Ben’s neck against his will. Deep down, he still fears the surprise deflationary scenario.

    And his instincts may well be correct.

  53. qw says:

    me2200,

    impressive mea culpa, seriously. Its not that common.

    The interesting thing to me is why you would expect them to do much different. Regardless of what you think should or needs to be done, the pattern has been well established and there hasn’t been much talk to guide the markets toward something different.

    The talk earlier was to try to dispell the idea that they might pause or that inflation might be sufficiently whipped.

    They allowed the market to wander down that path and needed to yank them back. Now we are back on the path we were on before. Its unclear when we will get off.

  54. VL says:

    The following is the full text of the statement released today by the Federal Reserve:

    “The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5 1/4 percent.

    Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

    Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.

    Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives. ”

  55. me2200 says:

    “impressive mea culpa, seriously. Its not that common.”

    That is how you learn. Develop a theory, take a stand and deal with the feedback.

    “The interesting thing to me is why you would expect them to do much different. Regardless of what you think should or needs to be done, the pattern has been well established and there hasn’t been much talk to guide the markets toward something different.”

    I thought for sure that this was going to be where BB make his divergence from recent history. I think the 25 BPS steps have been silly.

    “The talk earlier was to try to dispell the idea that they might pause or that inflation might be sufficiently whipped.
    They allowed the market to wander down that path and needed to yank them back. Now we are back on the path we were on before. Its unclear when we will get off.”

    I disagree. We are on a path, alright. I suspect that we will see inflation get seriously out of control. I don’t think we are going to see the slowdown that some expect.

  56. emd says:

    haven’t we seen this one before. damn this is getting old.

    drip…….. drip………. drip……..

  57. VL says:

    The Fed: “inflation risks remain” and “The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information”

    What is this current market euphoria all about? A pause?
    I read their statement as they remain data dependent and leave the door open for more possible rate hikes.
    Am I missing something?

  58. PeterB says:

    It appears a lot of hot air was blown into the 50bp rate hike balloon. The market is acting like what was 90% likely would happen is some sort of huge victory.

  59. me2200 says:

    I don’t know what all the euphoria is about either, but I bought in. I suspect that the market thinks we get another 60 days to rally before we have to worry about another rate hike.

    I bought oils. They are seriously under valued as far as I am concerned.

  60. trader75 says:

    Here’s my .02:

    All roads lead to US consumer slowdown, which in turn leads to global economic contraction. Oil and commodities are priced at the margins vis a vis Asian demand. If the consumer peters out, or just slows down to a critical point, Asian demand for energy and raw materials tails off enough for prices to decline. Marginal demand for oil, for commodities, for dollars, all go slack. An inflationary environment turns all-around deflationary with surprising speed. Inflation: now you see it, now you don’t. This winds up being bullish for gold, a stable cash proxy as central bankers find themselves ‘pushing on a string,’ i.e. debasing their currencies and stimulating to no effect.

    Alternatively, Bernanke and his CB pals lay off the hawk talk early enough to avoid the deflationary scenario. They decide that, between a rock and a hard place, tolerating a bit of inflationary brouhaha in the asset markets is a better bet than stepping into the deflationary quicksand too readily. Remember, Ben cut his teeth on the Great Depression. He probably has dreams about it. In a scenario where the world’s CBs get together and hatch a backroom plan to save us all, reflation is the order of the day. Stocks go up and gold goes up a lot more.

    Bernanke’s real job is to manage the biggest debt liquidation in history. US imbalances have gotten so great, there’s no way out other than liquidation. Regardless of whether the environment is inflationary or deflationary, gold is the other side of the US debt liquidation trade. But things ain’t so simple as slaying inflation as if it were a dragon and Bernanke were a Lancelot. Deflation is potentially a more serious threat.

    Maybe the markets know that there is some party time left if / when Bernanke does Neville Chamberlain redux. Maybe the smarter players know that deflation is the real danger, but they party hearty anyway and ride the false trend. Maybe the false trend could stick around a while if the fed’s reflationary activities have legs and gold doesn’t freak people out aqain too quickly. Maybe by a miracle of miracles Joe Blow consumer hangs on for another three to six months, giving time for the market to blow everyone’s minds with new highs before BR’s 30% correction comes along with a vengeance.

    Just some food for thought.

  61. qw says:

    me2200,

    “I disagree. We are on a path, alright. I suspect that we will see inflation get seriously out of control. I don’t think we are going to see the slowdown that some expect. ”

    The path I was talking about was the Fed path, not the economic path. I was merely saying the fed is still in its same pattern of doing quarters until it doesn’t do quarters. While they may have softened the tone some they have the interest rate path back on the idea that we are at or near neutral, we still see some inflation pressure, we may do some more hikes, stay tuned. Thats the path (fed path) we have been on for almost a year now and we are still there until Big Ben tells us differently.

    Where the actual economy is with respect to inflation, GDP, etc, that I am not making any prognostications about at this time.

  62. Btch_sort says:

    trader75,

    Well said about consumer and deflation. Enjoy your comments.

    Thanks

  63. whipsaw says:

    hmmm, I claim victory on both the 25 bps and the rally prognostications! heheh.

    And a nice silly rally it was too, “Nothing’s changed, buy, buy, buy!”

    So I bought some deep ITM March SPY puts a few minutes before the close at a decent price using the swag that I stole during Phase I of The Great Bull Hunt.

    Out at 1140 in September, tick, tick, tick.

  64. me2200 says:

    Very interesting discussion, guys. I like reading about all the points of view. Thanks for sharing.