Could there be a 50?
It's been interesting to watch the market lately. It seems like the thought of cheap money disappearing is putting a big hurt on share prices. What's interesting to me is all the "Fed Talk" by various officials about unacceptably high inflation. It is a little bit strange. Oil prices haven't changed for a while, gold has come down by more than $100/oz, housing prices have leveled off, so what gives? Is the fed trying to inflict pain on the market? Are they really trying to mop up the liquidity? When the minutes of the last fed meeting came out, I was astonished to hear that they were considering a 50 bp increase in rates. Well, back then, they were not talking about inflation with nearly the same intensity as they are now. So the question begs itself. If they considered 50 bps in May, why not consider a 50 now? The dollar is under a lot of pressure, so increasing the spread will certainly keep the dollar attractive relative to other currencies. Want to raise risk premia? Bring out the hammer and squeeze out the marginal speculators. Ultimately I don't believe it matters. We have such a highly leveraged, indebted society that over time, even a fed fund rates of 5.0% is too high. As the fed has been raising rates in baby steps, it gets closer and closer to producing a "market event". Something has got to give. Will a large hedge fund blow up a-la LTCM? Will it be a major bank incurring huge loses through it's derivatives trading? Will the stock market crash again? At some point, we have to stop being an asset economy and start being a real economy again. So I say just do it. Pop the bubbles, heal the wounds and lets move on.