THURSDAY MARCH 25, 2010

Tightening for the Fed

This blog has long discussed the Fed's easy monetary policy and its potential impact on inflation in the long term.  The Fed has made it very clear that it has no intention of tightening policy anytime soon and perhaps justifiably so.  The current inflation numbers are reasonably well behaved.

However, other events are essentially tightening policy for the Fed.  The recent budgetary problems of Greece, and now Portugal, have made investors weary of holding the Euro.  The trade has been to sell Euro and fly to the quality of the U.S. dollar.  The recent strength in the dollar will act to control inflation in the U.S..  It is a 'back door" tightening for the Fed.  Similarly, recent tightening of policy by other countries, notably China and Australia, will also help to control inflation.  So, the Fed may be able to keep its 0% interest rate policy intact while other events do the their dirty work of controlling inflation

However, an interesting thing is occurring in the U.S. Treasury market.  The bond market knows there is and will be a never ending, massive supply of new Treasury bonds coming to the market.  The recent Treasury bond auctions have not gone well.  The market is showing signs that it is beginning to choke on the supply, at least at these low yields.  Yields are creeping higher and higher, so the market is tightening for the Fed as well.  As these yields rise, the ability of our government to fund its profligate spending will begin to get very expensive!

POSTED AT 1899-12-30 09:06:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

RECENT POSTS

Better Unemployment Number

The "Safety of Bonds" Myth

Just like that!

Ugly August

Bright Side of Double Dip Fears

All eyes on Wyoming

Lack of Business Confidence

Are bonds forecasting a double dip?

Are rates too high?

Slowdown?