Tomorrow, Tomorrow

The end of the Alan Greenspan era is upon us with Ben Bernanke taking
over the Fed at tomorrow's meeting. Not that anyone's expecting
anything dramatic from that. Bernanke is virtually certain to raise
interest rates again to 4.5% on the Fed rate - the 14th consecutive rise
in short-term rates. At that level, the Fed rate will be .02% below the
10-year bond rate, which is going to make it really, really difficult
for banks to lend money. Typically, this type of crunch, which is
called a yield-curve inversion, presages a recession. Maybe that won't
happen this time. Maybe it will.

The real interest is going to be in whether the Fed indicates a pause in
rate hikes after this one. If no such pause is indicated, then mortgage
rates are going to skyrocket. If the Fed says something about being
nearly done raising the cost of borrowing money, then there's a chance
that rates could stay around the 6% range. The Fed raises rates to ward
off inflation, figuring that restricting the supply of cheap money will
keep prices from rising. But inflation is tame, you say. Recent CPI
numbers show an increase that measures out to an annual rate of 1.2%.
Any smaller growth and you get deflation (prices falling) which nearly
everyone agrees is bad because it passes directly to falling wages. Oh,
what a tangled web we weave.

So why make another rate increase to ward off inflation that doesn't
exist? There are signs, in fact, that the rising rates will kill off
the housing market, which is the main source of money for the economy at
this point. The Fed raises rates not because it is stupid, though I
have indicated in the past that I think it is, but because it follows an
incorrect economic model. There's a lot of math here and I am far from
qualified to do it or to explain it to others. But I can point to one
thing - the bond market itself.. Markets are only wrong when they are
either 1) tampered with or 2) deceived. The bond markets are not being
tampered with and they are not deceived. It is the Fed that is
deceived. This will become obvious over the next couple of years and
Ben Bernanke will have to be truly as good as advertised to keep the Fed
from being under serious investigation for incompetence. You read it
here first.