The Fed Chickens Out

By Duru

May 4, 2005

 

"Pressures on inflation have picked up in recent months and pricing power is more evident. Longer-term inflation expectations remain well contained. "

This is probably the key quote from the latest Fed psychobabble.  The Fed has finally begun to bend to the larger market forces that are keeping a lid on long-term interest rates.  The bond market never really believed the Fed when it claimed that inflation has become a larger problem.  Greenie and company have now officially chickened out and will no longer beat its head against this "conundrum."  The stock market's recent malaise no doubt also helped push the Fed out of the way.  Just to keep some semblance of suspense going, the Fed insists that inflation is looming for the short-term.  The Fed also insists that while they are chickening out, the rate hikes will continue:  "With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured."  We now have it both ways…rate hikes for now, but since longer-tame inflation is under control, the hikes must come to an end sooner than later.  And it is for the latter news that the market has so desperately swooned.

Right on cue, the market rallied big today with some promising developments brewing on the technical outlook.  I remain skeptical, but I am willing to play along for the heck of it.  Old man Kerkorian decided to put a floor under GM's stock with an offer of $31/share.  This sent GM rocketing out of its 10-year lows and almost two points past the level of Kerkorian's benevolence.  The entire move hit the richter scale at 18%.  That is quite a powerful move for a big, stodgy industrial stock, and it serves notice that this market still looks attractive to some big players…even if it is all fun and games (after all, nothing has changed about GM's extremely ugly financial picture).  Layer on all the recent high-profile mergers and acquisitions, especially in retail, and we get one interesting buying frenzy.  How can you be a bear when the folks with real money keep shopping for deals, right?

Finally, just as I thought the powers-that-be were signaling to the rest of us that the time has come to tighten up our spending and credit habits, we get word that the U.S. Treasury is considering bringing back the 30-year bond.  Since we originally junked the thing because the government was rolling in a surfeit of funds, we can only assume that we have received a sure indication that the government's new-found, long-term indebtedness is here to stay for quite a while longer.  Layer on the promise of a Fed closing in on its short-term rate target, and we get another hall pass for spending and borrowing!  Enjoy the party while it lasts folks….and please be careful out there!

 

© DrDuru, 2005