The Fed cut interest rates 75 basis points to move the Fed funds rate down to 3.5%. The market was expected a cut at the January meeting so the cut came early in response to the market. The stock market rallied off the overnight lows but was not able close higher.
We have to now look forward, but the bond market is telling us that the Fed is still behind the curve. Treasury 3-month bill rates are at 2.22 percent and the 2-year Treasury is at 2%. Fed are stuck up at a higher level by over 150 bps. There is a either a recession panic in bonds or the Fed is behind the curve. Note that if we are at a core inflation rate of 2.5% the Fed funds rate is still in positive territory. This may not be the easing that people expect. The Fed funds rate is negative only if you assume that headline inflation is the right number. This may not be enough to stop a recession.
The Bank of Canada cut its rate by 25 bps which places its target rate at 4%. This will have only a modest impact and may have been more for show. What is more of a worry for the Bank of Canada and other central banks is that a low relative fed funds rate will mean that further dollar declines will be coming which will make exports more expensive at just the time when more output would be helpful. The ECB and Bank of England must be thinking that some action may be necessary to keep rates in line with the US. The Bank of England must also be looking carefully at the economic numbers because they have been coupled with the United States during this credit crisis and it will be hard for the BOE to take a different view. This could be the catalyst for more inflation.
We have to now look forward, but the bond market is telling us that the Fed is still behind the curve. Treasury 3-month bill rates are at 2.22 percent and the 2-year Treasury is at 2%. Fed are stuck up at a higher level by over 150 bps. There is a either a recession panic in bonds or the Fed is behind the curve. Note that if we are at a core inflation rate of 2.5% the Fed funds rate is still in positive territory. This may not be the easing that people expect. The Fed funds rate is negative only if you assume that headline inflation is the right number. This may not be enough to stop a recession.
The Bank of Canada cut its rate by 25 bps which places its target rate at 4%. This will have only a modest impact and may have been more for show. What is more of a worry for the Bank of Canada and other central banks is that a low relative fed funds rate will mean that further dollar declines will be coming which will make exports more expensive at just the time when more output would be helpful. The ECB and Bank of England must be thinking that some action may be necessary to keep rates in line with the US. The Bank of England must also be looking carefully at the economic numbers because they have been coupled with the United States during this credit crisis and it will be hard for the BOE to take a different view. This could be the catalyst for more inflation.
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