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!