Inflation, Interest Rates and The Upcoming Fed Meeting on 12/12

Confounded Interest ^ | 12/08/2012 | Anthony B. Sanders

[whitedog57]

Over the last 12 months, interest rates around the world have come tumbling down. In terms of 10 year sovereign yields, the US fell 40.8%, Germany fell 80.4% and the UK fell 49.1%.

Mortgage rates in the US have fallen as well, but not as much. According to the Mortgage Bankers Association, the 30 year fixed rate mortgage effective rate fell 16.51% over the past year. This decline is considerably less than the 40.8% decline in the 10 year Treasury yield.

The Fed realizes that whether or not the US goes off the fiscal cliff or not, its citizens are going to have less money to spend on housing and other goods going forward. Even if tax rates don’t go into effect until 2014, over 10 new Affordable Health Care taxes go into effect on January 1, 2013.

The Taylor Rule suggests that the FOMC raise the Fed Funds Target rate to 0.70%. Although no analyst thinks that this will happen (Bernanke told us so!)

One thing that troubles me is the low inflation rates as measured by our government. Notice that the inflation assumptions used in the Taylor Rule are quite low. While this may be accurate, bear in mind that agricultural commodities such as corn, wheat, soybeans, bean meal and rough rice have risen between 4.52% to 31.90% in the last year.

Of course, precious metals have all risen (except nickel) have risen substantially in the past year (especially silver and platinum).

While Treasury yields have fallen 40% in the past year, mortgage rates have only fallen by half as much. Plus, commodities are really rising rapidly! So, should The Fed really stick with its plan of adding even more Treasuries and Agency MBS to its balance sheet and NOT raising the Fed Funds Target rate?

Probably not.

[whitedog57]

No inflation, but wheat, corn and other commodities are skyrocketing along with precious metals. /sarc

[ScottfromNJ]

The real inflation rate using methodology from the Carter years before the government started fudging the numbers is 10%

http://www.shadowstats.com/alternate_data/inflation-charts

[mike_9958]

Please please please go over the cliff... I want Obama to hear the chorus of pain when all tax rates go up on his whole base.

One way or the other the Republicans own his butt. Let him squeal about the bad congress. Boehner will take the heat for congress and every Republican will get re-elected.

But Obama will get the blame... the low information voters don’t even know who congress is.