These are some comments from Dr. Hussman (more of his insightful comments can be found on www.hussmanfunds.com). Several times I wrote about the irrelevance of the Fed. Dr. Hussman ideas offer reasons to pause and think.
".......... it's unclear exactly how changes in the Federal Funds rate presumably cause changes in market interest rates – statistically, market rates lead and Fed Funds typically follow. We can of course argue that, well, the markets are anticipating the Fed. But why do we really need so badly to believe that a government entity that influences an overnight interest rate on a $41 billion pool of money (this is the entire amount of U.S bank reserves) is actually in tight control of a $13.8 trillion economy?......."
"Ultimately, what's really going on is that we in free market economies are very uncomfortable with the idea that there's nobody in control. As Voltaire said, “If there were no God, it would be necessary to create him.” And since we can be pretty sure that God's first priority isn't bailing out the mortgage market, we look to the Fed. When things are going smoothly, we understand that the economy is complex, and diffuse, and driven by millions of individual decisions. But when trouble strikes, we want to believe that there's somebody up at headquarters with their hands firmly on the controls of the entire operation."
My personal view is that the markets have already "eased". The rate on 13-week Treasury bills has sagged below 4%. The Fed will have to acknowledge the signals given by the markets.
More on http://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
3 comments:
Let's say you're correct and that the fed is irrelevant since the market has already eased. If that is the case, do you think the market rates would really stay below 4% if the fed chooses not to ease (I don't think they'll do this on Tuesday but this is a hypothetical). The key would be the reason for the fed not easing. If the underlying economic and inflationary conditions point to an aggressive policy, then the market will also have to acknowledge those same points by raising rates. Similarly in 1998 and 2001, the market was led by the fed into lower than normal rates to stimulate growth. The fed does sometimes play an active role. However this Tuesday will probably not be a case where they jump out in front of the market.
Hasn't there been defacto easing in the bond markets all through 2006--and even more aggressively this year--when the market (wrongly) anticipated the rate cuts that did not materialize? John Hussman has a terrific way of providing empiricism to substantiate his views and negate some popularly held views. But the market is more emotion than thinking at times, and I think that emotions will be in high gear. I think that there will be disappointment enough to go around regardless of what they do. But in the long run, empiricism reigns (thank goodness).
Though irrelevant, the actual perception of the Fed's relevance can in itself cause the Fed to be relevant.
Hypothetically speaking, lets say that no God exists. Nonetheless, "God" still has a pervasive effect on our everyday lives. 9/11 and its aftermath are the result mostly of radicals serving their God.
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