Interest Rate Roundup

Thursday, May 28, 2009

The Fed's Catch 22

Watching the market action this morning, I can't help but think the Federal Reserve is in a total Catch 22 situation. It can signal a plan to increase its purchases of Treasuries and mortgages to hold rates down. Indeed, speculation about just such a move has driven long bond futures up almost two points in price from the lows they set in the wee hours of this morning. But if the Fed does that, it will tank the dollar and spike gold. Just look at the Dollar Index and spot gold -- DXY has been falling tick-for-tick with the increase in long bond prices, while gold has been rising tick for tick.

The alternative is to let the bonds go where they need to. But if the Fed goes that route in order to give some support for the dollar and to stop the relentless rise in gold and other commodities, mortgage rates and rates on other loans rise. Ergo, the economy takes a hit.

This just goes to show there is NO FREE LUNCH, no matter what the bureaucrats in Washington would have you believe.


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