Is the Bond Market Hampering the Fed?

Here’s a real conundrum for ya: Who do you fight, the Tape or the Fed?

That’s my takeaway from an interesting WSJ discussion earlier this week: "As the Federal Reserve prepares to raise short-term interest rates again next week, officials there increasingly believe the bond market, which sets long-term rates, is diluting their efforts to tighten credit and contain inflation.

The result: The longer the bond market keeps long-term rates unusually low, the further the Fed is likely to raise the short-term rates it controls in an effort to keep the economy from overheating. Conversely, sharply higher bond yields would encourage the Fed to stop raising short-term rates."

click for larger graphic

Graphic courtesy of WSJ


I do not believe bonds to be overvalued, as the Chairman implied  in a recent speech. Low yields are consistent  with my expectations for modest economic growth next year –especially if the Fed keeps tightening.

Ultimately, I think the Bond market is more powerful than the Fed, at least over the long run. Thus, you watch the Fed (closely), but you don’t fight the tape.


Fed Sees Bond Market Hampering Its Steps to Keep Inflation in Check
Greg Ip
The Wall Street Journal, August 3, 2005; Page A2,,SB112301943179703006,00.html

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What's been said:

Discussions found on the web:
  1. BamBam commented on Aug 5


    The other angle I don’t quite understand is the LAG TIME necessary for monetary policy to affect the economy.

    In the UK, most mortgages are adjustable rate and are adjusted within the year. In the US, alot are still fixed, and those that are adjustable will adjust over a long period.

    My point is that maybe the LAG TIME for monetary policy to impact the economy in the UK is much shorter than in the US.

    If that’s true, yet the Fed tries to emulate the Bank of England, they will likely overcorrect.

  2. Bobby commented on Aug 5

    Inflation numbers are constantly adjusted down in order to prevent social security payments from increasing and any other programs tied to inflation numbers. Under Clinton the CPI lagged real inflation by an average of 2.7bp. Current inflation is far greater than what the fed is stating. Short term rates are trading at a discount to real inflation rates. ANyone whos not leveraged to the hilt including the US goverment itself is smoking crack. The fed should be selling hundreds billions of dollars of 50 yr bonds at 5%. Much less the 30 yr. The government controls the inflation numbers being reported. At the very least you’d think they’d be taking full advantage of their fuzzy math.

  3. The Nattering Naybob commented on Aug 6


    You have found the answer for the juiced economic reports and the benign inflation reports. Read between the lines.

    The central banks are in uncharted waters, they are publicly mandated to control inflation and stabilize prices.

    Privately they are mandated to debauch the currency and make things profitable for the banks and multi nationals.

    Its a liquidity issue that has led to chasing yield rather than investment in sustainable economic concerns.

    The central banks have lost control within their borders due to globalization and the free flow of capital towards labor at the margin (Global Labor Arbitrage).

    This is what has asset inflation out of control and has created MCJOBS for us and MCSHITJOBS for billions.

    RATES WILL RISE on the long and short end. They have to, this is the only stick left to smack down the speculators and prevent something really nasty from coming out of the woodshed.

    The existing bond market will get flushed as the higher yield new issues come out. FYI, Gross and Roach are complicit.

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