Thursday, April 07, 2005

The only real interest rate news on the world scene of late is coming from the Federal Reserve. Over the past few days Australia, the UK and the ECB all announced no change to their interest rates. At the same time, the consensus is that the Fed has only just begun. Or has it?

The dollar took a slight dip today precisely because the markets are beginning to wonder whether the Fed is really interested in bringing US interest rates to "neutrality". Now, of course, identifying a neutral interest rate is our modern version of debating how many angels can dance on the head of a pin. That being said, the markets think Stephen Roach's hope that US rates will rise as high as 5.0% in order to truly begin balancing the global economy is unlikely to be fulfilled.

The dollar fell against the euro and the yen as speculation waned that the Federal Reserve will raise interest rates in bigger increments.

Fed Chairman Alan Greenspan spoke twice in the past two days without commenting on inflation, causing the dollar to retreat . . .

``Most of the gains from heightened interest-rate expectations have almost fully been exhausted'' at this point, said Monica Fan, head of currency strategy at RBC Capital Markets Ltd. in London. The dollar may fall by the end of the week to $1.3060, last week's low for the currency, she said.

U.S. 10-year Treasury note yields fell yesterday, after Greenspan addressed a petrochemical group in San Antonio on April 5 without saying energy prices were inflationary.
We have yet to see evidence, as we have in the UK, that housing prices are part of the Fed's calculations. Real estate is wildly inflationary in many US markets, but raising the federal funds rate may be too blunt a hammer for the Fed to wield. However, the Bank of England's last 2004 rate rise initially put a wet blanket on UK housing prices, only to see the housing market throw off the blanket in early 2005.

Now some are worried rates in the UK are too high, putting an unwelcome damper on retail sales.
some economists are speculating that the next rate move will be down instead of up given that inflation is below the government's target while the retail sector is still struggling.

"The events of the last month and today's decision to leave interest rates on hold at 4.75% support my longstanding forecast that interest rates are currently at their peak and could soon begin to fall," said Roger Bootle, economic adviser at Deloitte & Touche.
Should be just in time to save the property bubble from truly deflating. It seems there will always be some bank that will provide a punch bowl to anyone still interested in partying.


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