Friday, November 21, 2014

Quote of the Day: "Fed Has Boxed Itself In" (Musical Tribute)

November 20, 2014
Fed’s Bullard: Fed Has Boxed Itself In When It Comes to June Rate Hike

“The probabilities about when the Fed would move off the zero bound are all piling up on this June meeting” because the U.S. central bank has led observers to believe major policy actions can only happen at meetings with a press conference to explain what just happened, Mr. Bullard said. The Fed’s talk about “being data dependent isn’t as credible as it should be” given this situation, he said.

The following chart shows MZM own rate (the interest rate the $12.8 trillion liquid money supply is earning).

Click to enlarge.

The market is suggesting that the interest rate is reaching a bottom. For the first time since the Great Recession, I am therefore inclined to believe that the rate hike may actually be coming as predicted.

If so, this red parabola will fail, as all economic parabolas eventually do. The failure would be to the upside next year. I don't expect there to be a lot of fireworks the instant it happens though.

That said, I don't have much faith that the Fed will engineer a soft landing. Oddly enough, knowing that Janet Yellen's first major interest rate hike decision will be made from inside a box does not bring me any additional comfort. I intend to have the clown horn standing by just in case hilarity ensues, lol. Sigh.

As a holder of long-term treasuries (with intent to hold to maturity), how concerned am I about the rate hike? I'm not concerned at all. I welcome it wholeheartedly. I have a bond maturing in January of 2016 (purchased in 2006) and I would like to reinvest it. I therefore hope that the economy can avoid a recession between now and then. I'm just not holding my breath.

Source Data:
St. Louis Fed: MZM Own Rate

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