The Fed is Done!
For now, it seems obvious to me that the fed is done with it's rate raising campaign. With the GDP number showing a rapid slowdown in the economy, there is not the political will to continue raising rates. The fed, I believe, is operating under the premise that a slowdown in the economy, by itself, will be enough to decrease inflationary pressures. Whether or not this is correct remains to be seen. With the drop in long term yields lately, it is apparent that bond investors believe that the fed will in fact be lowering rates in the near future. I think that this belief has also permeated itself into the stock market with the pop last week after GDP numbers came out. However, the canary in the coal mine wil be the value of the dollar itself. If interest rate differentials become less attractive to foreign buyers, then dollar denomenated assets may be dumped, or at least purchased in much lesser quantities. The fed is walking a tightrope. They want to keep the dollar stable because of the dependance on foreign funding of our defecits, they want to keep inflationary expectations in check to keep long term rates down, they want to produce a soft landing in the housing market without a major systemic shock. Can they do it? I have my doubts. Previous credit binges have never ended well. And the fed, no matter how well intentioned, cannot protect us from our own follies forever.