Posts filed under “Fixed Income/Interest Rates”

Is the Bond Market Hampering the Fed?

Here’s a real conundrum for ya: Who do you fight, the Tape or the Fed?

That’s my takeaway from an interesting WSJ discussion earlier this week: "As the Federal Reserve prepares to raise short-term interest rates again next week, officials there increasingly believe the bond market, which sets long-term rates, is diluting their efforts to tighten credit and contain inflation.

The result: The longer the bond market keeps long-term rates unusually low, the further the Fed is likely to raise the short-term rates it controls in an effort to keep the economy from overheating. Conversely, sharply higher bond yields would encourage the Fed to stop raising short-term rates."

click for larger graphic
Fed_extra08022005210101

Graphic courtesy of WSJ

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I do not believe bonds to be overvalued, as the Chairman implied  in a recent speech. Low yields are consistent  with my expectations for modest economic growth next year –especially if the Fed keeps tightening.

Ultimately, I think the Bond market is more powerful than the Fed, at least over the long run. Thus, you watch the Fed (closely), but you don’t fight the tape.

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Source:
Fed Sees Bond Market Hampering Its Steps to Keep Inflation in Check
Greg Ip
The Wall Street Journal, August 3, 2005; Page A2
http://online.wsj.com/article/0,,SB112301943179703006,00.html

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