Fed May be Wrong on Inflation - But Frightened Consumers Are Even More Wrong
On inflation, don
Good take on the inflationpan-o-mania fear.
I think the Fed would be wise to tick up the base discount window rate by 25 basis points... JUST enough there to shock people out of the "Fed isn't doing anything about inflation" fearmongering.
If they raise the rate unexpectedly it will send shockwaves through the equities markets and it will change the tone of all the media reporting. Inflation fear will then reduce down to a smaller group of people who will panic about it (oh look honey, inflation must REALLY be getting bad because the Fed raised the rates!!!), and the rest of the investment world that actually has their own cash in the game will shift gears and start looking at bonds.
i.e. if the Fed raises the discount rate slightly it will let out some steam in the oil and gold markets, and then you'll see CEO's complaining that the Fed is pulling out support prematurely, the economy isn't growing enough yet, unemployment is still too high, the recovery really hasn't caused that much inflation anyway, etc. etc.
Investors always bet that the Fed will repeat the action of the last meeting, so if the Fed ticks up the rate, a lot of investors will trade based on the bet that it will raise the rate again by the same amount again at the next meeting---a trend that paid off during the Greenspan years. So that means more money will be sucked out of the oil and gold markets and move over to the bond markets and Treasury prices will go up. When the Fed raises rates that improves the yields earned on all forms of US denominated debt, so more investors will be willing to extend credit to people and businesses because they want the higher returns.
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