Quiz: Pause or No Pause?

[VCJIM]

Both The Bank of England and the European Central Bank raised interest rates last week.

The Bank of Italy revealed that it cut US dollar-denominated reserve holdings from 84% at end-2004 to 63% by end-2005. The Bank shifted reserves to the pound instead, from zero to 24%.

[LA_Renter]

Good article from Reuters

http://www.turkishdailynews.com.tr/article.php?enewsid=50701

“True, the immediate U.S. market reaction to the European and UK rate hikes, which came alongside similar moves from Denmark and South Africa, was relatively muted.

But longer term, market experts contend a transition to higher rates in Europe and Asia that happens while U.S. borrowing costs stay put could have wide-ranging implications for financial markets. Most believe the dollar would be the first to take a hit.

“The U.S. rate cycle is nearing its end, whether or not the Fed pauses next week, and that comes with more pronounced tightening to come in Europe and Japan,” said Alex Beuzelin, senior market analyst at Ruesch International in Washington, D.C. “That opens the door for the dollar to trend lower over the final months of 2006.”

When it does, other assets like stocks and bonds denominated in dollars could also get hurt. But even more worrisome is the prospect that the carefully calibrated efforts of global central banks could be based on erroneous measurements

Policy-makers themselves are quick to admit that interest rates are a blunt tool. Overshooting tends to be the rule rather than the exception, although in the case of the United States, economic growth is usually sufficiently resilient to prevent a prolonged slump.

But this strength is untested in a truly interlinked world economy where geopolitical risks abound.

With most central banks around the world tightening monetary policy simultaneously — one analyst cited a ratio of nearly five rate hikes for every rate cut so far this year — the risk that the global economic behemoth will stumble to a halt is perhaps larger than ever before. The hangover from a prolonged period of easy money could be a rough one this time.”

[bubble_contagion]

Even if they pause, the long end of the curve will keep rising. Lately it has been inverted or flat. My take is that the curve will return to it’s normal shape. Long term interest rates will keep rising.

[PerryChase]

Now that the Fed paused, I more readily buy the argument that the Fed will intervene to prevent a big housing crash.

[theplayers]

I vote for a pause…

[powayseller]

I vote for a pause too….

Seriously, I was wrong on this one. I predicted one more hike.

While it is true that the effect of past hikes is still in the pipeline and will take 6-9 months to carry through, I think the Fed made a mistake by being weak on inflation.

I think staflation is here: inflation will keep rising while the economy slows. What should they be doing in such a situation?

Bloomberg reports this morning: Federal Reserve Chairman Ben S. Bernanke put his inflation-fighting credibility on the line after barely six months in the job, leaving interest rates unchanged even as consumer-price increases quicken….Fed watchers said the strategy is risky because there’s no sign inflation is abating, and failure may erode the credibility built up under former chairmen Alan Greenspan and Paul Volcker…. “If I’m sitting at the Fed, I have a tough choice here,” said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. “Which war am I going to fight: is it the growth slowdown or the inflation pickup? To me the inflation story looks a lot more serious at this stage.”

Harris, a former head of domestic economic research at the New York Fed, predicts two further quarter-point rate increases this year. ” UNQUOTE

[VCJIM]

This may be more of a popularity decision than one based on intelligence and data. It gives real estate professionals and others a reason to give consumers hope.

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