Federal Reserve & Interest Rates

High energy prices are beginning to take their toll on global economic growth and a number of measures are being considered to help alleviate some of the pressure..  It has been stated by oil producers and consumers alike that the $140 a barrel price of oil is unjustified and the figures seem to bear this out with supply outstripping worldwide demand by about a million barrels last month. 

Saudia Arabia is considering raising oil production by another 200,000 barrels after it raised production by 300,000 barrels last month.  The country has been drawing criticism from the other OPEC nations for the unilateral decision to boost production without the group’s approval.

Congress is also considering legislation to restrict large institutional investors in commodities markets as most of the blame is being placed on speculators for driving up food and energy prices.  While many are calling the heavy investment in commodities an inflation hedge, what it really is a hedge for is the falling price of the dollar which has been hammered since the Fed undertook it’s rate slashing campaign last fall. 

Despite the Fed’s assurances of keeping future inflation expectations low, high commodity prices are causing real inflation now.  Although the economy has slowed considerably over the last few months, consumer spending continues to grow with much of that being attributed to rising prices.

However, with the financial and housing markets still in a state of flux, relief in the form of higher interest rates aren’t expected until September at the earliest.  The recent signals from the Fed have served to prop up the dollar somewhat in the last couple of weeks but many analysts are still predicting the price of oil to break the $150 mark before the summer is out.

History has shown, at least for the past three decades that if the price of controlling inflation is a recession, then the Fed is usually willing to pay it.  However the difficulty the Fed is facing now is keeping the fragile financial system stable.  The Fed received a lot of criticism back in March for their bailout of Bear Stearns using taxpayer dollars to finance the acquisition by JP Morgan.

What most people don’t realize is how much the financial system is interconnected.  The staggering growth of credit derivatives in the last decade, whose notational values have grown to the hundreds of trillions, leaves firms open to massive counter-party risk.

The derivatives market was a new profitable arena which financial firms jumped into with abandon.  Since it is largely unregulated, firms were able to make sizable profits due to highly leveraged positions.

You can think of most derivatives as financial insurance policies that companies purchase to hedge against exposure to certain kinds of risk.  However, unlike true insurance companies, these policies are largely unfunded due to the above mentioned lack of regulation and highly leveraged positions.

Bear Stearns was the smallest of the investment banks but it’s failure would have caused a tsunami in the financial landscape.  While financial leverage can open the way to superior profits when times are good, it can spell disaster when times are bad.

 The Fed has had to pretty much step in and inject billions of dollars into the money supply in order for financial firms to increase their capital reserves that had been depleted from the subprime meltdown.  The capital was needed to prop up fragile derivative positions while they attempt to de-leverage themselves from the mess they’ve created.

The Fed isn’t afraid of a recession, they’re scared to death of another Great Depression that would most likely be the outcome if all those derivative positions get unwound.  It wouldn’t be limited to this country either, it would be a failure cascade of global proportions.Il scopo di Keno e quello di indovinare quali numeri, iniziando da 1 a 80, saranno selezionati dalla macchina di casino online on net Keno.

Yields on Treasury Securities with maturities of between one and five years have climbed at least half a percent since the start of the month as investors have begun fleeing the safety of government fixed income securities despite the fact the economy continues to worsen.  Investor flocked to Treasuries in earnest back in March in the wake of the Bear Stearns collapse but now inflation concerns have overridden fears about a recession.

It seems that Wall Street isn’t buying into the Fed’s reassurances that it is committed to combating rising inflation expectations and right now they have about as much creditability as the administration does in it’s commitment to the “strong” dollar policy.  The steepening yield curve is actually beneficial to the struggling financial services sector at the moment as it borrows short and lends long.

American consumers are also starting to feel the brunt as high energy prices are beginning to bleed into the general economy with core inflation starting to creep up the last couple of months.  The weak dollar as also had a significant effect as America’s insatiable appetite for imports has also become more expensive.

With the Fed looking to delay raising rates for as long as possible with the housing and financial markets still a major concern, inflation will most likely continue to grow for some time due to the lag effects of Fed policy actions.  It is unlikely they will take any action next week at their regularly scheduled meeting and most analysts aren’t expecting any kind of change at least until September.

Oil exporting countries have resisted calls to increase production, calling current prices unjustified based on supply and demand dynamics.  As investors have continued to flock to the commodities market as an inflation hedge, prices have risen in an ever growing bubble that many are calling for the Fed to burst in order to give some sort of relief from soaring energy prices.