Interest rates close to right after last hike: Fed, Bernanke

Reuters via Yahoo! News ^ | March 21st, 2006 | Reuters

[economist-student]

Federal Reserve officials felt a 14th straight increase in interest rates last month put borrowing costs near where they needed to be, but agreed they could not rule out more hikes, given inflation risks.

"Although the stance of policy seemed close to where it needed to be given the current outlook, some further policy firming might be needed to keep inflation pressures contained and the risks to price stability and sustainable economic growth roughly in balance," minutes from the Fed's January 31 policy-setting meeting released on Tuesday said.

The minutes said some officials believed "somewhat" higher than desired readings on core inflation and inflation expectations reinforced the idea that further rate increases might be necessary.

"However, all members agreed that the future path for the funds rate would depend increasingly on economic developments and could no longer be prejudged with the previous degree of confidence," they said.

[economist-student]

Chairman Bernanke is trying to establish his reputation as an "inflation fighter".

But the following statement is quite contradictory:

..."in 2003 the Federal Reserve made explicit for the first time that price stability is a symmetric objective: It is important to avoid inflation that is too low as well as inflation that is too high."

Reflections on the Yield Curve and Monetary Policy

[VegasCowboy]

I thought another hike was a foregone conclusion. May I interpret his comments to mean this may not be the case?

[TampaDude]

I forsee, at most, one more .25 increase by the Fed...but I'm betting that they are actually done tightening for now. The housing price boom has pretty much topped out and leading indicators were down in February. Further tightening could be damaging to the steady economic expansion we are currently enjoying.

[economist-student]

Indeed, they will surely raise the fed funds rate all the way up to 5%. The hike on March 27/28 is guaranteed 95% while the hike in May has a chance of 50-60%.

[VegasCowboy]

So do you think the expected 3/27 hike is already built into the current yield curve? I assume it is.

I will probably be locking a mortgage in at that time, so I have a vested interest here. :)

[curmudgeonII]

The new Fed Chairman smells a lot like Greenspan [who was the major cause of our last two recessions].

[economist-student]

Best advice I could give, lock in a fixed mortgage no matter how attractive ARMs may look. Just out of curiousity, are you buying in any bubble-prone area?

[Cage Rattler]

DJ report indicating June eurodollar futures pricing in 88% chance of a 5% funds rate in 2Q06 and 100% chance in 3Q06 vs. 72% chance on Monday.

[VegasCowboy]

Yes, I'm in Vegas, which is definitely bubble-prone. However, I just sold a residence with considerable equity, so I'm really at no more risk in the new residence then I was in the old. I guess if I was really smart, I would have sold my home and began renting until the market leveled out. But, I'm going to take my chances under the assumption that I'll be in the house for at least 5 years and I plan to pay down my mortgage considerably.

I'm actually doing an ARM, but my rate is locked for 10 years. I did extensive analysis on where I'd be in 10 years using a 30 year fixed and the 10 year ARM, and the extra payment going to principal each payment with the 10 year product made it a no brainer. Famous last words, right?

[economist-student]

Excellent analysis!

If it's fixed for 10 year it makes a lot of sense. Use the extra monthly savings and invest them in gold or a commodities index. That would be a good hedge against price swings in the RE market.

How big is the rent vs. own difference per month? A way to determine over valuation is by calculating in how many years it will take to recoup your investment by renting the property. For example, a $50,000 apartment rented at a about $500 will take less than 8 years (assuming no price inflation) to repay the principal.

[ARCADIA]

The dollar valuation is dropping against the Euro; usually, that means another rate hike to prop it up before gasoline prices climb even higher.

[RightWhale]

policy firming

Does that mean increasing the interest rate?

[economist-student]

The euro is also a doomed currency. Hyper-valuation in housing in Spain (I believe, it's the biggest RE bubble in the world) makes it harder for the ECB to continue tightening interest rates.

In fact, Europe just posted its first global current account deficit (Spain has the biggest current account deficit in the world percentage-wise)

[economist-student]

They are raising interest rates, but at the same time they're printing money like there's no tomorrow. That's the famous "quantitative easing".

Five year M3 graph:

[ARCADIA]

They are, and so are we. An economy based entirely on cheap debt is unsustainable. We are stuck between a housing bubble and rising energy costs and the clock is ticking.

[economist-student]

The only solution is either outright default to our foreign obligations or "inflate or die". The former will have huge short-term implications while the latter will have even greater long-term implications such as continually declining living standards and capital misallocation

[VegasCowboy]

Thanks!

The rent market here is a little murky, so I can't give you a good answer. Apartment rent has sky-rocketed because of a bunch of condo-conversions, and the detached market has a lot of dogs (so its hard to get a feel by reading the paper). However, I don't think the tax effected monthly cost of home ownership is out of line with rents right now based on purely anecdotal information.

[Petronski]

We're all doomed. Doomed! DOOMED!!!

[RegulatorCountry]

"The only solution is either outright default to our foreign obligations or "inflate or die"

Both scenarios mean currency devaluation, so why default? You'd have excessive inflation either way.

[martin_fierro]