Interest Rate Roundup

Thursday, May 11, 2006

What a surprise? The Fed gets it wrong

Yesterday, the Fed screwed up. There's no other way to describe its actions.

Yes, the Ben Bernanke Fed increased short-term rates by one-quarter of a percentage point to 5%. And yes, the post-meeting statement acknowledged that "possible increases in resource
utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures."

But in practically the same breath, the Fed claimed: "The run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing
productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained."

What planet are these people living on? Seriously. Higher prices for energy and commodities are the very definition of inflation. To continue focusing on this ridiculous artificial construct of "core inflation" is insane.

The bottom line is, we have too much money chasing too few goods, services, and assets -- worldwide. Money is pouring out of central banks in every corner of the globe. While short-term rates are rising in the U.S. and elsewhere, they're NOT rising enough to stem the liquidity flow. That means this "tightening cycle" is not tight at all.

Little surprise this morning, then, that oil prices are jumping again ... gold is surging ... copper is going ballistic ... and long-term Treasuries are getting spanked. Traders realize the Fed is NOT being tough enough on inflation. So they're flocking to inflation hedges and running away from assets most vulnerable to price declines from rising inflation.


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