1/4 point, or . . . ?
I simply don't know how all this 50 basis point chatter got started and pinged around Wal Street like its a likely option.
Hell, why only 50 ? Why not 100, if the economy is so damn strong?
Let's open up a thread on this:
Does anyone think that much besides a 1/4 point is in the cards tomorrow? Major language change? And what might Mr. Market have to say about all this.
Discuss:
Wednesday, June 28, 2006 | 10:00 PM | Permalink
| Comments (67)
| TrackBack (0)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00d834d2532869e2
Listed below are links to weblogs that reference 1/4 point, or . . . ?:
Comments
I've been "calling for" 50bp increases for 6 months (ie, that's what I'd like to see) but I certainly don't exped the fed to think as boldly as me... I think they're confused as to whether fighting apparent inflation now will require fighting deflation later. Go ahead, and flame me, but the impending real estate hard-landing in CA has serious enough implications that I think all markets (equity, interest rate and commodities) are confused as to the outcome 1 yr out. What to be long, what to be short, if your horizon extends more than 6-9 months?
Posted by: mike | Jun 28, 2006 10:14:20 PM
I can't imagine that the Fed will go higher than a quarter point increase tomorrow. Bernanke doesn't want to shock the market and some of the Fed governors are concerned about raising rates too high (although I would argue that they already have).
There's no reason for a half point increase tomorrow when they can simply raise the Fed funds rate by a quarter point and state that future increases will be data dependent.
The big risk, in my opinion, is that the data coming in before the August meeting compels them to raise rates yet again in August. That would not be helpful heading into the always precarious September/October period (which may be even more volatile this year due to the uncertainty surrounding the elections and which party will control Congress).
Moreover, given the delayed impact of interest rate increases, the Fed might find in late '06 or early '07 that the economy is slowing rapidly and that rates are far too high.
At that point, it is too late and a recession is a real possibility.
And that's not even considering geo-political risks.
Bruce Sherman
Posted by: Bruce Sherman | Jun 28, 2006 10:15:38 PM
I call 50 basis points and no hint of stopping.
Why ? Inflation is ACCELERATING. The hikes that have been done this far haven't slowed it at all. That requires an accelerating rate increase.
The market will sell off.
I'm sitting in 100% cash. I made 4% in oils in the last week. I'm up 5% over my May 10th totals.
Lets see what you are made of, Ben ! Lets have it.
Posted by: me2200 | Jun 28, 2006 10:20:33 PM
I speculate it will be 50 basis points, because I think the Fed is looking for an excuse to pause. There are elections coming in October. Additionally I think there is concern about appreciation against the Euro and particularly the Yen. We've actually seen trade deficit narrow a little bit the last 3 months. The problem with 25 basis points is that the next meeting is up in the air unless they declare there won't be another increase. 50 gives the Fed time. I think they want that.
Posted by: M.Z. Forrest | Jun 28, 2006 10:21:01 PM
We will see at least 50 bps between the June and August meetings.
I say at least because if you haven't noticed, copper is still at $3+, oil is at $72 today and nothing is slowing down. The housing numbers were stronger than forecast this week.
2 months is too long to leave things run. 25 bps will show that Bernanke is soft and it will take 2 months to see if he has the backbone to really get in front of inflation. So it will be 50 bps tomorrow. Things need to slow down. Oil will feed through to inflation, it is just a matter of time. Go look at the inflation numbers for the 1970s. It takes a few years. Inflation has a head of steam already and it needs to be fought.
And don't expect him to say we are done either. He might say he expects 50 BPS to contain it, but we will still be data dependent. Bernanke can't and won't say he is done until we get inflation under 3%.
Some people are saying that BB has targets. I think he does and I think they are 1.5-2.5%. 3% is too much.
BTW: 1 in 6 think 50 bps is in the works.
http://post.polls.yahoo.com/quiz/financeresults.php
Posted by: me2200 | Jun 28, 2006 10:29:41 PM
I believe that the 1/2 point talk is based on the idea that the Fed needs to shock liquidity out of the system. They need to do something to stop the speculators. The higher they raise rates, the harder housing will crash. If they shock the markets, they don't need to go as high. But if they shock the market too much, they will be blamed for any problems that come up in the near future. Going up 100bp tomorrow would cause a huge selloff in everything. It could crash some market or the dollar.
I don't see any need for them to go up by a multiple of 25bp. If they go up 35 or 40, it will still shock the markets but won't leave rates quite as high.
Is it normal for 1-6 month treasuries to get below the Fed Funds rate? Why would anyone be willing to lend money at a rate below the overnight rate they can pretty much be guaranteed to get? I can understand long bonds inverting if people expect rates to drop in the future, but I don't see how anyone can seriously believe that the Fed Funds rate will be below 5 anytime in the next 3 months. Why aren't banks doing the arbitrage of shorting short-term treasuries and lending the money in the Fed Funds market?
Posted by: jkw | Jun 28, 2006 10:34:38 PM
"I can't imagine that the Fed will go higher than a quarter point increase tomorrow. Bernanke doesn't want to shock the market"
Man, I just gotta comment on this... this market has been "one and done" for about a year now.
What are they thinking ? Oil has to get south of $50 for it not to be a risk to inflation. House prices are holding, not falling. Copper is $3. TIPS are still running 250+ bps. Rent is rising.
We need to understand something: for the last 5 or more years, the interest rates have been artificially low. That is ending. All the excess economic stimulus is ending. Sure it would be nice to keep the interest rate at 5%. But guess what: I don't think it can be done without creating bubbles. When the interest rate is at 5%, Joe consumer can borrow way too much money and things get out of control, ala dot com and now housing.
So... we are headed back to the good ole days of mortgage rates of 8 to 10%. Inflation is easy to contain then and the economy is strong enough to handle it after a period of adjustment.
Posted by: me2200 | Jun 28, 2006 10:34:54 PM
I agree with the 35 or 40 bps idea. It doesn't have to be 50. But it won't be 25. And he won't say they are pausing or stopping. It will remain data dependent.
GREAT DISCUSSION, guys. I didn't know that anyone other than me thought that 25 bps would OK.
Posted by: me2200 | Jun 28, 2006 10:36:35 PM
Frankly, I'm more interested in what Japan does next month. If Japan does raise their rates, I wouldn't necessarily expect an immediate, dramatic sell-off since this may have been priced in to some extent (but I could be wrong). However, they do seem to "flinch" every time the markets react poorly to any serious tightening efforts on their part. So if they were to hold off on an increase, I could see where that might unleash the speculators again - at least for a while.
Posted by: Pilot Fish | Jun 28, 2006 10:38:25 PM
I don't get where the talk about a stop come from ! The ONLY thing I can see getting hurt by the rates thus far are the gold traders. The market sold off, sure, but that is just because everyone thought we were done. WRONG.
Corporate mergers are now starting to get very rich. There is still a lot of money sloshing around.
Commodity prices are creeping into things. One of the tire manufacturers said they were really feeling commodity prices.
Posted by: me2200 | Jun 28, 2006 10:39:53 PM
If we are in year 4 of a 20 year commodity bull cycle, isn't Bernanke going to have to do something to tame the demand for commodities ?
Quite frankly, I think that is what is behind all the recent tightening. CBs can see what is going on and the mess it will lead to if they don't all do something. I suspect that BB is getting pressure from other CBs to work in unison with them, especially since we are big time consumers.
Wasn't there a big CB meeting not too long ago ?
Posted by: me2200 | Jun 28, 2006 10:42:03 PM
me2200,
I don't think the fed can afford to be aggressive. If the dollar starts significantly regaining from its five year declines against the Euro and Yen, traffic won't move in Long Beach due to all of the shipping containers coming off. Boeing and other shops have benefited tremendously against the declining dollar.
Posted by: M.Z. Forrest | Jun 28, 2006 10:47:49 PM
The Fed is behind the curve and they will need at least 50 basis points in the near future to catch up and obtain control over the inflation, but I do not think we will see 50 basis points tomorrow unless the latest core PCE deflator is high (The Fed will know this data tomorrow but we will find out about the core PCE deflator on Friday)
Most likely we will see 25 basis points tomorrow and another 25 in August. Even though 50 basis points is less likely; nevertheless, it is possible if the latest core PCE deflator is high.
Posted by: VL | Jun 28, 2006 10:51:56 PM
Kudlow is the one who started this 50bp talk. Remember his little birdie that told him the Fed isn't afraid to "shock the market."
It doesn't matter, the Fed has lost control of inflation. Oil touched 72.70 today, less than 4% off the nominal all-time high. Someone is desperately refusing to let gold push above $600.
Aggressive Keynesian fiscal stimulus in the form of some new foreign policy adventures is the only feasible plan for keeping this thing together.
Notice the escalation of tensions in the Near East. IDF back in Gaza. IAF buzzing Assad's palace today. Could be a hot summer.
BR is only CNBC commentator I know of with the courage to point out how this recovery has been largely based on war spending. It's amazing he is still allowed on the air.
Posted by: sell_the_ten_year | Jun 28, 2006 11:07:58 PM
If oil at $70 is inflationary, does that mean oil at $140 is twice as inflationary?
A wee bit of sarcasm there.
Point being, what about the high cost of energy as a drag on economic activity? We've been able to suck it up until now, but we've also been in a housing-boom, wealth-effect, sea-of-liquidity environment up til now.
The disconnect is that inflation / deflation risks aren't linear. If / when consumer spending slows to a critical point, we could transition from an inflationary environment to a deflationary one rather quickly.
And aren't all these rich corporate mergers more a lagging, rather than a leading, indicator? All that cash was already accumulated in a highly profitable environment that no longer exists.
Flashy displays based on yesterday's gains don't say much about the deteriorating conditions of the current environment. If the consumer is going into the tank, corporate profits will likely follow.
It would be interesting to review Bernanke's comments before he turned into superhawk (the 'Neville Chamberlain' phase). If I recall correctly, he was of the opinion that pending economic slowdown warranted caution--and may still believe it.
Posted by: trader75 | Jun 28, 2006 11:18:27 PM
My personal guess is that we'll see the expected 25 point increase and nothing new as far as policy language goes. They certainly aren't going to announce what will happen in August since that depends on what happens in July, etc.
I don't know what the market reaction will be in any case, but would lean towards the idea that this week will close with a rally that sputters along until the NFP next week when everything tanks nicely. I'll buy SPY puts somewhere along the line, but it looks like they aren't going to get cheap again like I had hoped. bah.
Posted by: whipsaw | Jun 28, 2006 11:22:19 PM
50bps? Keeeeeeeerist! Ain't no way. None. Zero. Nada. Zilch. I'll eat my hat.
It got started from the release of the minutes from the last meeting where an FOMC member wondered out loud if they should increase by 50bps. That was a warning to fast money driving commodities and likely planted. ie, Discussed before the meeting to be entered into the minutes to shake the traders driving commodities. It's called good cop, bad cop and it's likely a little bit of salesmanship. The FOMC wants to sell Wall Street on their inflationary hawkishness without having to kill the economy to prove it. (It happened at the exact same time margin requirements were raised on the NYMEX. Gee, what a coincidence.)
THE PRIME RATE IS 8%. You think you can get a loan for 5%? How about Prime+2 IFFF you have great credit? Rates are already at 8 to 10%.
The Fed likely already has killed the economy. Much of everything that will likely unfold is very laaaaagging. If a slow down isn't imminent, it would be a miracle. It's worth pausing to see because now the rate hikes could be pounding the economy with a sledgehammer. Let's see data flow in over the next six months. If we aren't at negative GDP growth by EOY I'll be surprised. Oil? It isn't driven off of fundamentals. And, you watch it drop at the first sign of a significant slowing. The Fed doesn't need to target commodities and Bernanke has written historically that he does not believe in such action. So, that would mean he is changing his beliefs? I don't think so. You will not find an economist anywhere on plane earth who will tell you inflation is sustainable without wage inflation. I'm not talking about the type of inflation that is always in the system. Our system is built on some inflation. I'm talking runaway inflation. WITHOUT MORE MONEY IN THE CONSUMER'S POCKET, PRICING PASSTHROUGH IS NOT SUSTAINABLE AND WILL ULTIMATELY YIELD A SELF FULFILLING OUTCOME OF A SLOW DOWN and an abatement of inflationary pressures. Why has it taken hold in input prices this cycle? Excess liquidity. If housing prices drop, so will all input pressures from commodities. We MUST see wages start to increase for housing to stay elevated and inflation to take hold beyond this business cycle. May happen but there's a valid argument it won't if we are already five years into this economic cycle
Housing is not just going to collapse. It isn't a highly liquid market like stocks where prices fall 30% in a month. But, with the supply imbalances, history says they will drop and drop hard in certain areas. Does anyone here drive looking out the windshield? Because your economics are through the rearview mirror. You should all apply for a job at the Federal Reserve. You'd fit right in. The time for aggressive hikes was before the imbalances became extreme. Not now that they are and the economy is teetering on the precipice.
Posted by: BDG123 | Jun 28, 2006 11:26:23 PM
A quarter point and a cloud of dust.
Posted by: Fred | Jun 28, 2006 11:29:47 PM
I thought it was the bulls who wanted 50bp on the premise that the Fed (at least under Easy Al) used to end a tightening cycle with "50bp and done"? It's supposed to be some kind of crescendo and an all-clear signal to take stocks higher. That's my interpretation of Kudlow's wet dream.
If I were Bernanke I'd do exactly the same as the last time: 25bp and the same exact statement. Keep hiking, keep them guessing that there's more to come, and show them that he's not going to be pushed around by any pundits in the media or salesmen at the brokerages.
So when they think of him flying around in a helicopter, they won't picture him in a Jet Ranger dropping sacks of cash on "Easy Street", but prowling around in a gunship shooting speculators.
Oh the easy-money crowd and the salesmen will cry and whine about him all right; they'll fear his next move and voice their worries about August on CNBC, but they'll respect him a little bit more in the morning.
Posted by: Craig H | Jun 28, 2006 11:33:58 PM
the Fed will pause. no hike.
Posted by: rob | Jun 28, 2006 11:34:37 PM
The Fed Funds Rate will continue with it's "Groundhog Day" increases, just as with the previous sixteen increases. Quarter point, quarter point, quarter point....
.
Posted by: VJ | Jun 28, 2006 11:38:41 PM
My bet is they will do 25 just as they have been and keep the language the same and we will be doing this same guessing game in August....as long as they keep this going eventually the slowing economy will leave them no choice in the markets eyes (which I think they might welcome) but to pause.
I also can't believe how people are now considering increments other than 25 and 50bps. This is getting out of control. Do we really think 5bps more or less is going to do anything....haha.
2 points:
1) Mets looked bad tonight...Someone needs to hit Lastings some fungos prior to the game.
2) I thought Cody was only rude to u Barry, but it turns out he interupts everyone w/ a differing opinion...and I find it bothersome that the guy criticises everyone bearish and talks about how "cheap" techs are yet claims to be only in cash and some MSFT...oh yeah, and now some Apple....unless of course Apple continues to plunge, then he will somehow claim he is 100% cash again.
Posted by: Sammy20 | Jun 28, 2006 11:42:02 PM
I like Jim Sinclair's comments:
www.jsmineset.com
Posted by: bobby | Jun 28, 2006 11:49:43 PM
It will be 25 with very little change in language.
Its clear that me2200 wants interest so high that the economy will crater by the positions he has staked out. Wanting something to happen has no impact on whether or not it does.
Mortgages at up to 10%. Please. Not for a very long time. We will go through a cycle of easing again long before mortgages reach 10%.
Mortgages haven't been 10% for 20 years.
Posted by: qw | Jun 29, 2006 12:02:37 AM
It will be 25bps. ECRI-FIG which has a lead time of 9 months peaked October of last year. Greenspan called it one of his favorites. We will see inflation numbers (at least the official ones) turn down August or thereafter.
On the other hand, the rate hikes could always have a hysterical finish.
Posted by: RB | Jun 29, 2006 12:36:13 AM
