Tuesday, February 22, 2005

It appears that Alan Greenspan's commitment to predictability and a massive early warning system to the market has bitten him right in the ass.
The Fed has raised its target interest rate six times since June 30, intending to prevent the U.S. economy from overheating later this year. Instead, the increases are having the opposite effect: They're spurring the economy, not reining it in. . . .

The unexpected booster shot creates a risk that easy money will spur growth, which in turn may accelerate inflation, Richard Berner, chief U.S. economist at Morgan Stanley in New York, said in an interview. Faster inflation is the very thing the Fed wanted to head off with higher interest rates.

Keeping inflation at bay would mean ``short rates are going to have to go up considerably,'' Berner said.

Among signs suggesting the rate increases haven't damped consumer or corporate spending: Bank lending for commercial and industrial loans surged 6.6 percent since May 5, the month before the Fed began tightening. Mergers and acquisitions in this year's first six weeks reached the fastest pace since 2000. Housing starts unexpectedly rose 4.7 percent in January to a 21-year high after a 14 percent surge in December. The 30-year fixed-rate mortgage two weeks ago dropped to a 10-month low of 5.48 percent.

``It's an ideal time to put money to work,'' Paul Beard, treasurer at Sparks, Maryland-based McCormick & Co. Inc., the world's largest spice company, said in an interview. ``The feeling is that rates are going to continue to rise.''
The implication here, of course, is that the market can see well into the future that Greenspan et al. will slowly, gradually and predictably raise the federal funds rate in measured 25 basis point steps for the near-term and thus are keen to borrow like mad now so as to lock in the low rates. Plus, global liquidity means the carry trade is only growing more attractive. Just because Uncle Alan says the party's over doesn't mean it's over at all.


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