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Jul. 2nd, 2005 04:18 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
which_chickThe FOMC (Federal Open Market Committee) has raised the federal funds rate in every meeting since June, 2004. In that time, the federal funds rate has gone from 1.00% to 3.25%. (I got my data for what the Fed has been doing from http://www.the-privateer.com/rates.html.) In that same timeframe, yields on 10-year Treasury dooflickies have done jack shit. (That data came from http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield_historical_main.shtml, a page that loaded promptly and was easy to read. I mention this because government web sites frequently can't manage either one of those things.)
Watch now as I employ my shitty-ass html skillz to provide a table comparing the ffr to the 10 year Treasury dooflickies since the ffr started to increase back in last June. I'm sure all ya'll are as interested in this happiness as I am, so let's get down to business. (Isn't that a song lyric from somewhere? It's been bugging me for weeks, the "Let's get down to business" thing. Anyone know? Edit: It's an Eminem lyric from The Eminem Show. Google knows all.)
I do not write html for a living, and it shows. Anyway, we can see from the data that, in the last year, the federal funds rate has gone up while the yield on ten-year treasuries has kind of wandered around in the wilderness. (Probably it's following a pillar of fire.) Near as I can tell, this is not what the yield on ten-year treasuries is SUPPOSED to be doing. People generally expect that, as interest rates go up, the yield of ten year treasuries ALSO goes up. But this time... interest rates are going up at a measured pace while treasury yields are wandering in the wilderness. What's with that? I dunno. (Greenspan doesn't know either. He calls it a conundrum.)
Because I'm a complete wanker, I made a graph showing the federal funds rate AND the yield of ten year treasuries since 1990. Data points are when the fed has moved things, but I can't get freaking Excel to draw it on a scaled, real-time axis. This is because I'm an idiot or possibly because Excel hates me. Anyway, the federal funds rate is PINK and the 10-year yield is BLUE. The only points I plotted were dates when the fed actually made rate changes -- it's important to remember that there are eight meetings a year but that the FOMC doesn't change rates every time. Too, please note that the ten year treasuries can move for reasons that do not have a whole lot to do with the fed. (Probably I need to get out more, if this is what I'm doing on a glorious Saturday in the middle of summer.)
Finally, this is not investment advice. It's a graph. D'oh.
Anyway, looking at the incredibly lame Excel graph thing that I made, there, we can see that the 10-year (BLUE) goes under the federal funds rate (PINK) three times on the graph... once in the beginning, once from September, 1998 to November, 1998, and once from May of 2000 to April of 01. When the 10-year yield goes under the federal funds rate, that's an inverted yield curve. (I bet you'd about given up waiting for me to talk about the inverted yield curve, hadn't you? You should have more faith in me.)
An inverted yield curve is problematic because it's not good for for the economy. The primary difficulty with an inverted yield curve (besides the fact that I can't ever fucking spell yield in less than two tries) is that if Joe Investor can get just as good a return on his money with short-term (couple of months, maybe a year) investments as he can from long term stuff, why the hell would he lock his money up for ten years or more? That's a hard sell for anyone... and there's the suckage. (I understand that the 10-year Treasury yield is not synonymous with "investment in business" but it's the figure everyone, including our man Greenspan, is looking at with some interest these days.)
The reason we're talking about an inverted yield curve when we don't HAVE one right now is because, referring to the graph there, it looks an awful lot like we're HEADING towards an inverted yield curve. Long term rates aren't moving. Our man at the FOMC appears to be staying the course with his measured increases and his assessment of monetary policy as accomodative. I realize that this is a little like Magic 8-Ball, only with real money, but you work with what you've got. If I thought holding Mr. Greenspan upside down and shaking him while asking him my question would be more illuminating, I'd be doing it.
Now. Is the FOMC raising rates fast enough? I don't think so. I think that our way-too-accomodative monetary policy is part of what's fueling the current insanity in the housing market. (The other fuels for the housing market are wonky mortgage products, which I've spoken about before, the enthusiasm people appear to have for sucking out their equity and blowing it on stupid shit, and a general lack of faith in the stock market following the dot-com shit.) I do not think that there IS a happy ending to the situation we are currently in and I'm reasonably sure that what we're doing here is peeling off a bandaid. We can peel it fast or we can peel it slow, but it's gonna hurt. I've always been of the one-quick-rip school, myself...
However, raising the rates steeply would do some very unhappy things. First off, it'll put a real big hurt on the poor dumb asses who have recently purchased overvalued houses using extreme leverage and wonky mortgage products. It'll hammer the home-building industry (one of the few growing sectors of our really-rather-unhealthy economy). Odds are quite good that a sharp increase in interest rates could slam the entire country (or at least all the important parts of it) into a recession the likes of which my generation has never seen... with disastrous political consequences.
A more measured rate of increase, like what the FOMC is doing, will allow the Fed to shift from [Jedi voice]There Is No Housing Bubble[/Jedi voice] to [Jedi voice]blah blah froth blah some markets[/Jedi voice] to, eventually, [Jedi voice]blah blah irrational exuberence blah blah[/Jedi voice] over time. (This is, if you'll recall, what they did with the dotcom stuff back in the day when Nasdaq was stratospheric.) That way, there can be foreshadowing with the statements and nobody who matters (Who matters? The people who pay attention to the Fed. D'oh. The rest of the country can go hang.) will feel unfairly surprised. The measured increases will also give the central bank a bit of time to inflate the currency (so that people can pay off their huge debt using less-valuable dollars -- the only people who will get screwed with that are the people who have big piles of money about the place, and that's NOT most Merkins). It'll allow for the new bankrupcty regs to take effect (in October of 2005) so that people making more than the median income will be on the hook for their debt, come what may -- that'll soften the blow to banks and the mortgage-backed security market, at least some. And it'll allow for the smarter people out there to see the darkening of the skies and take shelter before the heavens open, so that not everyone gets soaked to the bone, just the really stupid ones. I think that a policy of continued, measured increases (helped along by some quiet inflation and suitable statement-foreshadowing) is probably the most palatable course of action for the people in charge, the one that will have the least political and social fallout.
I just don't think it's the right course of action. *sigh*
Watch now as I employ my shitty-ass html skillz to provide a table comparing the ffr to the 10 year Treasury dooflickies since the ffr started to increase back in last June. I'm sure all ya'll are as interested in this happiness as I am, so let's get down to business. (Isn't that a song lyric from somewhere? It's been bugging me for weeks, the "Let's get down to business" thing. Anyone know? Edit: It's an Eminem lyric from The Eminem Show. Google knows all.)
I do not write html for a living, and it shows. Anyway, we can see from the data that, in the last year, the federal funds rate has gone up while the yield on ten-year treasuries has kind of wandered around in the wilderness. (Probably it's following a pillar of fire.) Near as I can tell, this is not what the yield on ten-year treasuries is SUPPOSED to be doing. People generally expect that, as interest rates go up, the yield of ten year treasuries ALSO goes up. But this time... interest rates are going up at a measured pace while treasury yields are wandering in the wilderness. What's with that? I dunno. (Greenspan doesn't know either. He calls it a conundrum.)
Because I'm a complete wanker, I made a graph showing the federal funds rate AND the yield of ten year treasuries since 1990. Data points are when the fed has moved things, but I can't get freaking Excel to draw it on a scaled, real-time axis. This is because I'm an idiot or possibly because Excel hates me. Anyway, the federal funds rate is PINK and the 10-year yield is BLUE. The only points I plotted were dates when the fed actually made rate changes -- it's important to remember that there are eight meetings a year but that the FOMC doesn't change rates every time. Too, please note that the ten year treasuries can move for reasons that do not have a whole lot to do with the fed. (Probably I need to get out more, if this is what I'm doing on a glorious Saturday in the middle of summer.)
Finally, this is not investment advice. It's a graph. D'oh.
Anyway, looking at the incredibly lame Excel graph thing that I made, there, we can see that the 10-year (BLUE) goes under the federal funds rate (PINK) three times on the graph... once in the beginning, once from September, 1998 to November, 1998, and once from May of 2000 to April of 01. When the 10-year yield goes under the federal funds rate, that's an inverted yield curve. (I bet you'd about given up waiting for me to talk about the inverted yield curve, hadn't you? You should have more faith in me.)
An inverted yield curve is problematic because it's not good for for the economy. The primary difficulty with an inverted yield curve (besides the fact that I can't ever fucking spell yield in less than two tries) is that if Joe Investor can get just as good a return on his money with short-term (couple of months, maybe a year) investments as he can from long term stuff, why the hell would he lock his money up for ten years or more? That's a hard sell for anyone... and there's the suckage. (I understand that the 10-year Treasury yield is not synonymous with "investment in business" but it's the figure everyone, including our man Greenspan, is looking at with some interest these days.)
The reason we're talking about an inverted yield curve when we don't HAVE one right now is because, referring to the graph there, it looks an awful lot like we're HEADING towards an inverted yield curve. Long term rates aren't moving. Our man at the FOMC appears to be staying the course with his measured increases and his assessment of monetary policy as accomodative. I realize that this is a little like Magic 8-Ball, only with real money, but you work with what you've got. If I thought holding Mr. Greenspan upside down and shaking him while asking him my question would be more illuminating, I'd be doing it.
Now. Is the FOMC raising rates fast enough? I don't think so. I think that our way-too-accomodative monetary policy is part of what's fueling the current insanity in the housing market. (The other fuels for the housing market are wonky mortgage products, which I've spoken about before, the enthusiasm people appear to have for sucking out their equity and blowing it on stupid shit, and a general lack of faith in the stock market following the dot-com shit.) I do not think that there IS a happy ending to the situation we are currently in and I'm reasonably sure that what we're doing here is peeling off a bandaid. We can peel it fast or we can peel it slow, but it's gonna hurt. I've always been of the one-quick-rip school, myself...
However, raising the rates steeply would do some very unhappy things. First off, it'll put a real big hurt on the poor dumb asses who have recently purchased overvalued houses using extreme leverage and wonky mortgage products. It'll hammer the home-building industry (one of the few growing sectors of our really-rather-unhealthy economy). Odds are quite good that a sharp increase in interest rates could slam the entire country (or at least all the important parts of it) into a recession the likes of which my generation has never seen... with disastrous political consequences.
A more measured rate of increase, like what the FOMC is doing, will allow the Fed to shift from [Jedi voice]There Is No Housing Bubble[/Jedi voice] to [Jedi voice]blah blah froth blah some markets[/Jedi voice] to, eventually, [Jedi voice]blah blah irrational exuberence blah blah[/Jedi voice] over time. (This is, if you'll recall, what they did with the dotcom stuff back in the day when Nasdaq was stratospheric.) That way, there can be foreshadowing with the statements and nobody who matters (Who matters? The people who pay attention to the Fed. D'oh. The rest of the country can go hang.) will feel unfairly surprised. The measured increases will also give the central bank a bit of time to inflate the currency (so that people can pay off their huge debt using less-valuable dollars -- the only people who will get screwed with that are the people who have big piles of money about the place, and that's NOT most Merkins). It'll allow for the new bankrupcty regs to take effect (in October of 2005) so that people making more than the median income will be on the hook for their debt, come what may -- that'll soften the blow to banks and the mortgage-backed security market, at least some. And it'll allow for the smarter people out there to see the darkening of the skies and take shelter before the heavens open, so that not everyone gets soaked to the bone, just the really stupid ones. I think that a policy of continued, measured increases (helped along by some quiet inflation and suitable statement-foreshadowing) is probably the most palatable course of action for the people in charge, the one that will have the least political and social fallout.
I just don't think it's the right course of action. *sigh*
