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The Fed's Strategy

March 14, 2005

In simple terms:

Force short dated yields up at a faster pace than long dated yields.

This will:

  • Cool the economy at the coal face, and
  • Cool the rising stock market, and
  • Provide underpinning support for the US Dollar, whilst
  • Minimizing the threat to the real estate markets

Here is the evidence (Courtesy stockcharts.com)

1. 30 Day:5 Year

2. 5Yr:10Yr

3. 10yr:30Yr

Now, one effect of this is to squeeze profit margins of lending institutions

Which, in turn, should eventually slow new lending to real estate without sabotaging the existing market (chart courtesy DecisionPoint.com)

Note the sharp drops in 2004 and 2005 from which there was subsequent recovery, and note the lower tops on the PMO.

Further, rising rates at the short level will encourage short term money to flow into the USA - thereby underpinning the US Dollar

Note the rising bottoms on the PMO - even as the dollar has reached a washout

Conclusion

You gotta give the guys "A" for effort.

Will it work?

My son is writing a book which represents a "synthesis of human knowledge". It should be ready for publication by the end of this year. His conclusion is that humanity is entering a new era. If we fight it, we will experience the pain of Armageddon; but if we embrace it, we can break through to new heights of existence.

I think he is right. I think we are witnessing one of the "last battles" in a dieing age.

My bet? The Fed will eventually lose, but the timing is impossible to call.


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