I assumed the Fed would keep rates high to keep the dollar strong. We should all do some reading on the possibility of this scenario, because it would change the outcome for housing, that’s for sure.
It also appears the gov’t may not care if the dollar weakens. Sure, it means our long term bond yields rise as foreigners dump them, and our interest payments on the long-term debt goes up. But at the same time, our exports will be cheaper. A weaker dollar is good for our exports.
The media writes that the Fed is raising interest rates to contain inflation. Is that the real reason? I don’t really know. Is it likely that the Fed is raising interest rates to entice foreign investors to buy our bonds?
Has anyone studies the Federal Reserve Flow of Funds report? In the Dollar Crisis, Richard Duncan publishes lots of the FF data. I was surprised that foreigners hold more of our stocks than our Tnotes and Fannie Mae bonds. Raising interest rates will lower stock prices, and foreigners may sell their stocks, but that doesn’t hurt the economy. The Fed needs to make sure someone keeps buying our government debt.
The whole liquidity problem, the source of the money coming out of our houses, is global investors, who are willing to take very low risk premiums to buy mortgage backed securities. This is the real cause of the housing bubble. Don’t blame realtors any more! I will start a thread on this soon.
