Wednesday, September 16, 2009

FED Will Not Raise Rates!...(anytime soon)

From ZH:

Bonds getting a beat down after the following rumor has circulated:

medely report- hearing ny consultant reporting at least two fed members support raising rates next week....hearing it goes on to say fomc may launch a campaign in favour of exiting emergency policy but again the dovish members would not follow a serious intent

Why are some members (possibly) starting to balk at super-uber-dovishness? Because they realize dis-inflation is over, and as consumption/asset price reflation begins to kick-in the massive monetary/fiscal stimulus will start to move to the price level. The technocrats are stuck believing in the inflation-growth trade off: that as long as there is economic contraction/economic slack there can't be price inflation. Of course this is ridiculous... just ask an Argentinian.

So, some members correctly seeing a lack of dis-inflation incorrectly attribute this to economic strength. They feel this "strength" gives them leeway to preempt the effects of monetary easing and fiscal expansion. Sadly they don't realize (or maybe they do?) the box they are in: monetary/fiscal policy having a diminished effect at pulling forward real short-term growth while simultaneously causing increased domestic inflation expectations and pressure on the forex value of the USD.

The Fed is not in a position to raise rates at this time, both politically and economically. As a new wave of mortgage resets are on the horizon, asset prices remain well below their 2007/2008 highs, employment is still very soft, and private investment remains in the crapper they would not dare let off the accelerator. Their fear (if you believe them) is deflation... if the CPI index goes from ~ 218 to 212 - in the heart of our deflationary "crisis" - and they expand their balance sheet by well over 100% (with the fed gov running a $1.5 trillion deficit) do you honestly think they are worried about some future price inflation?

UPDATE: Fed Fund Futures basically flat since late AUG with slight erosion in price-action:

UPDATE 2: The 1m t-bill rate heading back towards 0 doesn't portend a raise anytime soon