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In response to the GDP data bonds did nothing. They have been rallying on the weaker economic data, indicating they don’t believe the growth will sustain higher rates or more rate hikes. The Fed Funds Futures contract still shows just three 25 basis point hikes in the next four meetings. After the GDP data and the deflator bonds held steady because they see the inflation and they know the Fed (inflation? Club). The Fed will raise rates to fight inflation and to get to at least 3.5% regardless of the damage done. It will then worry about if it needs to stop or cut. History is replete with examples that this standard operating procedure by the Fed reacts too late for the economy. It causes a slowdown (at a minimum), and with oil prices that have held historically high rates for months and months and driving season not even here yet, the problems are not going to go away this summer.
Thus the Fed is going to keep raising short rates to fight inflation. At the same time the long end will remain flat because the bond market does not see the economic growth due to high energy costs, an already slowing economy, and the Fed raising rates into a slowing economy. That will lead to a flat curve, a curve that is already its flattest in three years. At this juncture its forecast of a recession is still very, very low, but if the flattening continues that percentage will grow. If it inverts a recession is a historically done deal.
The Fed is still walking the tightrope that we discussed back at the end of 2004, and the rope is getting narrower and shakier. It kept rates low an awfully long time to get everyone over the worry of deflation. That ended up being too long with all of the solid fiscal stimulus, and demand has outpaced supply. Now it is trying to play catch up and get rates higher while the economy slows. It is trying to slip them by us in 25 BP increments as it continues to talk about the strong economy when we all see that it is not so strong when we have to spend $40 to fill up, diverting $10 from other expenditures to pay for transportation. That is a big hit on the economy. The Fed is in deep once more and it is likely to drag us in with it.
Again, the thing that could save us would be fiscal stimulus in the form of limiting some of the pork our tax dollars are spent on and diverting it to investment credits for businesses and some for consumers. Pork you ask? How about federal money for the study of mariachi music? $6.3M for ‘wood utilization’ research. What, do they need to know that wood can be used for baseball bats, houses, desks, chairs, etc? How about $1.7M for the International Fertilizer Development Association? Just spreading fertilizer? In 2005 there are almost 14,000 special interest projects, up 31% from the 10,656 in 2004. Some argue it is a drop in the bucket compared to the overall budget, but this largesse with our tax dollars is an insult to every hard working taxpayer. The federal government takes our money and uses it in so many unconstitutional ways that even the Congressmen that want to read the bills and cut down on spending cannot keep up. The founding fathers would be aghast.
Thus the Fed is going to keep raising short rates to fight inflation. At the same time the long end will remain flat because the bond market does not see the economic growth due to high energy costs, an already slowing economy, and the Fed raising rates into a slowing economy. That will lead to a flat curve, a curve that is already its flattest in three years. At this juncture its forecast of a recession is still very, very low, but if the flattening continues that percentage will grow. If it inverts a recession is a historically done deal.
The Fed is still walking the tightrope that we discussed back at the end of 2004, and the rope is getting narrower and shakier. It kept rates low an awfully long time to get everyone over the worry of deflation. That ended up being too long with all of the solid fiscal stimulus, and demand has outpaced supply. Now it is trying to play catch up and get rates higher while the economy slows. It is trying to slip them by us in 25 BP increments as it continues to talk about the strong economy when we all see that it is not so strong when we have to spend $40 to fill up, diverting $10 from other expenditures to pay for transportation. That is a big hit on the economy. The Fed is in deep once more and it is likely to drag us in with it.
Again, the thing that could save us would be fiscal stimulus in the form of limiting some of the pork our tax dollars are spent on and diverting it to investment credits for businesses and some for consumers. Pork you ask? How about federal money for the study of mariachi music? $6.3M for ‘wood utilization’ research. What, do they need to know that wood can be used for baseball bats, houses, desks, chairs, etc? How about $1.7M for the International Fertilizer Development Association? Just spreading fertilizer? In 2005 there are almost 14,000 special interest projects, up 31% from the 10,656 in 2004. Some argue it is a drop in the bucket compared to the overall budget, but this largesse with our tax dollars is an insult to every hard working taxpayer. The federal government takes our money and uses it in so many unconstitutional ways that even the Congressmen that want to read the bills and cut down on spending cannot keep up. The founding fathers would be aghast.