Fed Pushes Short-Term Rates Up While Manufacturing Sector Weakest in Two Years
There had been some concern that the Fed would begin to deal with the threat of inflation more aggressively by pushing short-term rates up by a half of a percent rather than a quarter of a percent;
but with growing evidence of sharp weakening in key sectors of the economy, the Federal Reserve elected not to hit the economy with an unusually hard blow. The latest increase in the federal funds rate—one of two key rates the Fed sets—now puts it at 3.00%. The Federal Open Market Committee, the rate-setting arm of the Fed, meets periodically to decide what monetary policy to pursue and how aggressively to pursue it.Dark Wraith CyberGloss
The "discount rate" is the rate at which the Federal Reserve would lend money to a bank. The Fed changes this rate to signal capital markets about its standing monetary policy.
Because long-term rates embed short-term rates, in addition to other factors, the latest increases by the Fed will ultimately translate into higher rates on all borrowing by businesses, consumers, and even local, state, and federal government. Although the private capital markets ultimately set yields on debt instruments, the rates set by the Fed are strongly correlated with what ultimately becomes of those yields in the open markets.Dark Wraith CyberGloss
The "federal funds rate" is the interest rate at which banks may lend money to one another.
Worries by many about the U.S. economy were further fueled on Monday as the Institute of Supply Management released it index for April activity in the manufacturing sector. This "manufacturing index" is a relatively broad measure of the level of business activity in the manufacturing sector. The index's level in a given month and changes in it from month to month indicate the health of this huge, critical component of the industrial economy.
While analysts had expected the index to hold at a reading of 55, instead it fell to 53.3, pointing to a weakening of the production side of the U.S. economy. Behind the raw number was evidence that manufacturers were attempting last month to pull back inventories, which other indicators have shown are rising as final demand weakens. Among other concerns about the slide in this number, as it approaches the critical value of 50, new jobs in the manufacturing sector may become fewer and farther between as manufacturers need less labor to fill orders.Dark Wraith CyberGloss
A manufacturing index value greater than 50 indicates that the sector is growing; a value below 50 means the sector is contracting.
After a string of strong up days for the stock markets, Tuesday was almost eerily quiet on Wall Street as investors had little reaction to what they had already expected from the Fed. There was little else to motivate large-scale buying and selling activity, either. That may change in the later part of the week as markets have an opportunity to chew on a few shards of economic data being released and investors have a chance to review a bid for a five percent stake in General Motors by the Kerkorian Group.
All eyes, however, will remain focused on numbers later this month for the producer and consumer price indices. With the Federal Reserve still pushing rates up by only a quarter of a percent at a time, it is signaling that it does not perceive inflation as becoming more of a threat than previously thought. In this regard, two hours after the Fed yesterday had released its traditional statement about what it had done to rates and why it had taken those actions, it rereleased the statement with one additional sentence stating that it believed long-term inflation expectations remain "well-contained." Although not without precedent, the unusual step of amending a public statement seems to indicate that the Governors of the Fed want to assure markets for the time being that there will be no surprising rate hikes for the foreseeable future. This should allay some concerns of investors, whose recent worries have translated into rather sharp swings in stock prices. But even with the run of good days recently on Wall Street, the general trend in stock prices has still been downward, with the Dow Industrial Average flirting perilously close to the 10,000 point mark, and the NASDAQ already well below the 2000 point level.
Published 5/04/2005 10:14:00 AM
<< 28 Comments Total
Interesting that the Fed. seems to do the same thing as ShrubCo. regarding the dollar, only in reverse. While ShrubCo. talks about wanting a strong dollar, while doing absolutely zero to make it stop dropping, the Fed. now talks about everything being hunky-dory while simultaneously taking a record string of measures to stave off a nasty wave of inflation.
- oddjob
Good afternoon, OddJob.
That's a good point. As interest rates across the economy rise, the dollar should get stronger. The problem with this is that it will only increase our reliance on imports.
The Bush Administration, on the other hand, was hoping the dollar would stay weak (their rhetoric to the contrary notwithstanding) to boost exports, which they hoped would keep the flagging domestic economy from sliding even further than it already has.
The difference between the two desired directions is that the Fed boys know what they're doing, so they'll get the effects they want, regardless of what the Bush Leaguers would like. The only saving grace is that, if the dollar really does gets some legs under it, imports will ease up in price, and that means we'll see at least some relief—at least for a while—from oil prices heading to the Moon.
That does not mean gasoline prices are headed back to their old, good-times levels. All it means is that the water in which we are all stewing will come to a boil more slowly.
That, of course, will mean we have time to add some carrots and potato chunks to the broth so the rest of the world can have a really flavorful and nutritious meal when our beef finally does get stewed.
The Dark Wraith adds pepper to the pot.
The Dark Wraith adds pepper to the pot.
Quite frankly, that felt like salt, not pepper!
I certainly am hoping the gas price will lower. If I had stock in oil companies, however, I would probably hoping the other way!
Afternoon, Dark Wraith.
Isn't it true that yields on longer term bonds have remained reluctunt to rise, despite the Fed's unprecedented series of overnight rate hikes? I think yields on the 10yr treasury are at roughly the same level they were a year ago; Greenspan himself highlighted this recently when he stated that the inertia in long term yields was a "conundrum."
If the 10yr yields remain "stuck" we might end up in a situation where yields on short term debt are higher than those on long term debt; a phenomenon referred to in financial parlance as the dreaded "inverted yield curve." The run to short term safety that this situation represents is such bad news that I don't believe there has ever been an inverted yield curve that did not lead to a recession.
Do you think that we need to throw inverted yield curves into our stew, as well, or do you think the inverted yield curve scenario is something we needn't worry about?
I dont even know why economists even bother analyzing American markets and labor pools any more. It is painfully obvious that there are less and less quality paying jobs available to people and less and less manufaturing going on in the States.
You can't spin.
I keep expecting to wake up one day and find that we have given up tracking the US Economy and now just follow the manufacturing/job markets in India and China.
Good evening, Mr. Shakes.
Yessirreee! Alan Greenspan is quietly twisting in his seat about a looming inverted yield curve. I even had a bit of a chuckle as he did a careful, little whine about the "conundrum" of long-term rates not moving upward in lock-step with short-term yields.
This is not, of course happening in all markets. Mortgage interest rates are rising, but it's those darned yields on long-term government debt instruments that are presenting the really scary scenario.
The problem is that the Fed has no direct control over the long-term structure of interest rates, so anything His Highness Greenspan has to say about it has no greater effect than the weight of the air coming out of his quite elderly lungs.
Now, you must understand that short-term rates really are one of the building blocks of long-term rates. That means, if long-term rates aren't rising as fast as short-term rates, something in the long-term structure other than the embedded short-term rates is counteracting the short-rate effect trying to push those long rates up.
Bad, bad news. The inverted yield curve (short-term yields higher than long-term yields) is symptomatic of something far deeper than is going wrong. And you're right: virtually every time markets have sustained an inverted yield curve for more than a very short time, a bad recession has followed.
But as I noted, the inverted yield curve is symptomatic: it isn't the cause, it's just the forewarning.
I have been bawling from the mountain for months now that a recession was coming, and it was coming because of deep, long-term, structural failures of the Bush Administration. Perhaps now that the inverted yield curve is showing up, other economists and news pundits will begin to take note that something has been damaged deep in the heart of America by neo-conservatives and other amateurs who had no business being allowed anywhere near grave and important responsibilities.
By the pricking of th' Dark Wraith's thumbs,
something wickéd this way way comes!
Now, now, Dr. Wraith, you must watch your desire to gleefully scream, "See? I WAS RIGHT ALL YOU FRIGGING ASSHOLES!!"
Such intense displays of Schadenfreude are most unbecoming in the undead!
- oddjob
What other factors contribute to the yield on long-term Fed. bonds? Care to speculate about which of those factors are counteracting the short-term bond rate rise?
- oddjob
Good evening, OddJob.
Primarily, the mechanical answer lies in some basics of supply and demand: investors are moving large amounts of cash into bonds because of their relative safety. But they're not moving into a broad term structure portfolio.
If yields are rising on short paper, that means prices on that paper are falling, since the price and yield of a given security are inversely related as a mathematical fact. If the prices on the short paper are falling, that would indicate that market demand for the short stuff is weakening relative to the long stuff, which must not be falling in price as strongly, since the yields on the long stuff aren't rising as rapidly. That means demand for short maturity bonds is getting weak as the demand for the long maturity stuff is holding its own because of good investor demand.
That would mean that investors prefer to send their money into instruments for the long haul rather than the short haul, indicating sentiment that is not just averse to what's going to happen in the short term, but highly averse to the short term.
Why "highly"? Oh, that's simple: an "inverted yield curve means that long-term rates are lower than short-term rates, which means people are willing to accept a lower yield to surrender their money for a longer period of time! That could only happen if they are so averse to the short-term outlook that they'll walk away from a higher return on short-term lending.
Now, that's a grim scenario, OddJob. Investors, banks, etc. normally want a higher yield to give up their money for a longer period of time. This is called the "maturity premium" embedded in an interest rate. It's why a 5-year car loan will have a higher APR than a 3-year car loan.
But, here we have a scenario where the maturity premium is turning negative: as the term to maturity of a debt instrument lengthens, the more the maturity premium is taking the yield DOWN!
That, OddJob, means the markets have a really, really dim view of what's coming right around the corner.
The Dark Wraith feels an emotional cold breeze.
Hmm... all this talk about warning sirens in the form of inverted yield curves and hurricane strength recessions makes me wonder how soon any of this is going to perpetrate its self on the American economy.
I'm sure when it comes it will be a spectacular failure of the economy and I sure hope most of us regular folks will be able to hold on to our shirts when the bottom falls out like it seems to be fixin' to do.
So do you figure we will be around the next stop on the highway to hell around Christmas this year. Or do you see it taking longer than that. I've almost got enough dollars to get my Everbank Euro account set up. ;)
Anyhow have a good night all...
-Gary A
All I know is, if it's coming for certain I sure hope it's strong enough and lasts long enough to cause people to vote OUT Congressional Repugs! That would probably make the remaining ones wingnuttier than ever, but the sooner they become a minority again the better!
- oddjob
"Austerity is just around the corner". -- Peacenik
Good Afternoon Dark Wraith,
I read this yesterday, and a phrase has been percolating in my coffee infused brain ever since:
...the Fed has been battling inflation since the middle of last year, stating that it had ceased to overproduce money—which is the sole cause of inflation—to accommodate the Bush Administration's inability to match federal expenditures to revenues.
So, the shrubbery have instituted a secret tax on our savings, our IRA's, our equity in our homes, and our pension - simply by printing an overabundance of dollars.
Shame on me, I should have known better, but I was under the impression that Greenspan would in the end try to protect the economy from the misrepresenter-in-chief.
I fear that the baby-boomer's retirements are to be raided ad nauseum, and we'll all end up working two shifts at Walmart until we keel over from exhaustion.
A few years ago I pointed out to my husband that buying and holding stock in the major defense corporation that he works for would mitigate the cut backs that the unionized workers were experiencing. He instead immediately sold his stocks in protest.
I didn't get it at the time, but now as I contemplate putting my money into the very corporations that are driving and exacerbating the instabilities in the world for their own gluttonous greed........
I find I can't do it.
So, Come to the Caberet, my friend..Come to the Caberet!
Gypsy, you know how to write devastating closings!
- oddjob
'In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold . . . The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth.' -- Federal Reserve Tsar Alan Greenspan in 1966
Hi Oddjob,
Thanks, I do get carried away sometimes..
Good afternoon, SB Gypsy.
RIGHT ON THE MONEY, by God!
Yes! Inflation is a hidden tax. We hammer and hammer at that in economics courses, but the message is lost from generation to generation. Once people are not exposed to the corrosive force of persistently high inflation, they no longer grasp what it does to an economy and how it functions as a backdoor system of taxation.
Here's the other thing, my good blogger. You might have heard that inflation benefits borrowers at the expense of lenders, and that is true, but it benefits only certain borrowers. The reason that inflation helps borrowers is that it erodes the future value of money, so the principal on a loan is falling in real value over time as inflation eats away at its real purchasing power in the future.
That's all well and good: inflation will slowly eat away at the real national debt the Bush Administration is creating.
But here's the downside. In a Keynesian economics framework, printing too much money might be a decent, short-run trick to increase the real output of an economy, as long as the policy is not pursued for too long. The reason this can work in the short run is because wages and prices are "sticky": they cannot react instantly to the oversupply of money. That means the only adjustment the economy can make is to increase real production. In the long run, once the wages and prices can react, the "real" effect goes away, and all of that extra money gets absorbed into higher prices.
(I must note parenthetically, here, that the Classical economists didn't care about the short run; they said all that matters is the long run, and in the long run, printing that extra money creates inflation, a statement with which any Keynesian would agree. The Keynesians' point was that you cannot ignore the short run because that's where the human suffering of the business cycles occurs, so you should stimulate the economy when it is pulling into recession, then go the other way when the economy is booming. By doing this, government can level out the business cycles to a large extent. The fact of the matter is that the Keynesians were extraordinarily successful in shortening business cycles and keeping the economy from going into the kinds of recessions and depressions that had been the case for centuries before them.)
Now, here's the upshot, though. In the past three decades or so, inflations might very well have benefited borrowers by eroding the future value of their obligations. However, the fact of the matter is that wages and salaries have not kept pace with inflation. In fact, the loss of real purchasing power by average, working Americans is simply staggering. Whereas the rises in the salaries of CEOs and other highly paid men and women have exceeded inflation by extraordinary proportions, this has not been the case—this has not even been close to the case—for the vast majority of people in this country.
Why is that? I shall leave that to you to answer.
The Dark Wraith must now head off to teach his Thursday evening class.
In the United States, the poor lose their money to the rich like it's going into one big sinkhole. The "debt" the poor owe the rich will never be paid, comparable to paying the minimum payment on credit card bills, only exponentially worse. It's like one big layaway, except the poor don't get to enjoy the final product in this lifetime but are required to continually make the payments.
It disheartens me. And the poor don't always have the energy to stand up, but we are the ones called upon to fight. Part of the mindset is "I won't let them make me run out of energy," and the other mindset is "I shouldn't have to do this." So insult is heaped upon insult which is quickly becoming unbearable.
wiseguy
I'm sorry but I have a non related question to ask: as far as I know today in NYC a British consulate was the target of a terrorism act (minor, major, whatever, but to me it was terrorism nontheless), however, it is being so downplayed that at this moment I'm wondering if it really happened... care to comment/explain this to me and the sanity/insanity of the situation and the actual state of security in the US of A?
By the way, what is to me more astonishing is the fact that some blogs (but no, I'm not addressing yours DW) that usually jump on subjects like this didn't pick up the subject almost making it a "non happening". I really am confused... maybe I had a nightmare about the consulate attack? :P
Good evening, Joseph.
There were two reasons why the attack on British interests in New York City didn't get legs in the mainstream media.
First, it was most likely not an attack by Muslims, so it isn't "terrorism" as that term has been carefully and subtly framed by the Bush Administration.
Second, were it to be publicly and immediately labeled an act of terrorism, it would put into question the ability of the Administration to protect the homeland.
By portraying it in a minor and sensational matter—acknowledging, as I shall, that no one was killed—it becomes an item of the news cycle rather than an issue of leadership. That, then, takes away the excuse the White House could have to exact revenge upon major news media outlets that broke rank from their implicitly understood relationship with the current power structure in Washington, D.C.
That we have once again been attacked within our borders is noteworthy; and it once again calls into question the competence of this Administration, which has shown time and again a preference for rhetoric over action and agenda over focus.
Ultimately, what happened in New York City will enter the statistics that are maintained on terrorism, but it will enter that database without fanfare. And because the neo-conservatives are like Classical economists in their complete insensitivity to what happens in the short run that might be contrary to their world view, what happened today will not affect their thinking.
It will, however, be used opportunistically when and if it is needed to call for more restrictions on the civil rights and liberties of all Americans.
There was a time, Joseph, when real conservatives would have said, "Don't make any new laws until you can show that you're enforcing the laws already on the books." While this new and false breed of sunshine patriots bawls for more statutes, regulations, money, and means by which to crush Americans and our good visitors under the boot of their tyranny, I must remind them that they do not carry the torch of what it is to be a real American, anyway, but certainly not they display their utter disregard for the solemnity of their duties and the right of Americans, in the words of a great Supreme Court, "to be let alone."
Instead, when it comes time, rather than grieving for their own inability to protect us from criminals and the violence they visit upon us, the neo-conservatives will cry for more power of the State to deny freedom to the citizens from whom they draw every ounce of their privilege as public servants.
And that, I submit to you, makes them unworthy of our trust.
The Dark Wraith has spoken.
Good evening Mr. Wraith. Do you ever reach those points in time where it is extremely difficlut to articulate a point due to an elevated degree of frustration? That's where I've been for a while now, I mean how do you articulate a point when a picture is worth a thousand words?
Thise week in review
Anyway, I haven't read a lot doomsday writing for a while now, after all recessions and peak oil will be much slower bullets to the head than a nuke. This article however, sums up what I have been feeling for quite a while now will be the Begining of the end.
Hey, I have a novel idea, let's impeach the lame ducker.
I'll tell ya, Mr. Goat, I see all of this nonsense, and I honestly ask myself, "Is this really just normal, and am I just going mad?"
Well, no and yes: whether I am going mad or not, though, this just isn't normal. This is all like watching some kind of self-destruct button the American electorate has pushed, and having pushed it, those same folks are now covering their ears and yelling, "LA-LA-LA" as the countdown proceeds apace.
The worst part is that, being a spectator who really has the good common sense to leave the room, I honestly want to stay just so I can watch the fur fly off their Neanderthal hides when this whole thing goes KA-BLOOEY. I'll be darned if I'm going to be denied my treat after all this aggravation.
Even more fun will be the part where the mainstream press continues its role as chief whitewasher and Administration cheerleader.
Of course, now that Texas is going to ban provocative cheerleading, the media will have to do its rah-rah song-and-dance without the dance. Somehow, they'll manage.
The Dark Wraith does the two-step.
Good Morning All-
I must post "Nyah Nyah, I was right!"...I've been working and being a mommy the past couple days, so I missed the terrorist attack in NY. I predicted an attack inside the US within 6 months of Bush starting a second term. Granted, I had expected it to be Muslim based, but with the attack overseas on our embassy{technically US soil) and now one literally in the continental states, I feel vindicated, if not vindictive.
Going even further off topic, the 18 year old(well, in 3 days) Bush worshipper at my place of employ has accorded me some amusement. She has a bumper sticker "Bush Kicks Ass", which I noticed coming into work on Wednesday. That night, she left her car in our lot while she went off with a friend. In an impish spirit, I printed "kisses" on the computer, cut it out and scotch taped it over "kicks". As of this evening, it was still there, affording her mother great and glorious amusement. We wonder how long it will be before she notices....(I really should have printed "Kisses Saudi" or "Kisses Cheney's", but wasn't sure how long before she would return and all my fellows who are aware of this are sworn to secrecy)
Wild Clover:
Egad, that's sweet!!!
Good morning, Wild Clover.
OFFICIAL POLICY STATEMENT OF THE DARK WRAITH FORUMS:
The Dark Wraith Forums does not endorse the defacement of cars.
EXEMPTIONS TO THE PRECEDING STATEMENT OF POLICY:
Said policy does not include altering bumper stickers to more accurately reflect facts on the ground, particularly when said alterations are applied to vehicles whose owners do not bother to regularly check the hind ends of their vehicles.
The Dark Wraith has issued policy.
Good morning, once again, Wild Clover.
Truth be told, I need to get to work on the finishing touches for the bumper stickers for the next fundraiser.
Now, I'm not saying you should do something inappropriate—in fact, I'll tell you right now that it would be wrong, wrong, wrong to do something like this—but it seems to me that, if someone is so oblivious to what is on the back end of her car, one extra bumper sticker might go unnoticed for quite a long time.
Sometimes, a pre-production sample of a run of bumper stickers has to be done, and that one just gets tossed unless there's some good reason to send it to someone who could put it to good use.
No, no, NO! That would be wrong. Yes it would.
Absolutely wrong.
Send me an e-mail, anyway, Wild Clover, and I'll mail you a bumper sticker for your OWN car when I do the pre-production runs in late June.
The Dark Wraith gets that whole bad idea thing out of his mind.
Mr Wraith, I would never deface someone's vehicle!...I was very careful that my alteration was easily removable....of course I also kind of assumed the tape wouldn't be on it for days. I would just hate for the adhesive to weld with the original sticker with time amd heat, as tape adhesive is wont to do.
Ah well, sweet little high school girls should not have bumper stickers displaying the word "Ass", or "Bush" for that matter on their vehicles...I know MY mother would have had a fit.
I am all aquiver with anticipation of what you would deem appropriate for a bumper sticker.