Reply #27: Today's WrapUp by Mike Hartman (Fed news)

[ozymandius]

Markets on Hold for Fed Announcement

Observing the markets today has been akin to watching water slowly come to a boil or spending the afternoon watching grass grow. Market participants are sitting on their hands as we await the interest rate decision and accompanying policy statement from the Federal Reserve, and later tonight we get the State of the Union address from President Bush. Markets are calmly expecting a 25 basis point increase from the Fed and will look to the statement for any change of rhetoric signaling the Fed’s intent for future increases. Economic and financial analysts are looking forward to the President’s speech tonight in hopes he will unveil some of the detail behind his proposal to overhaul Social Security. To date there has been a great deal of generalities with Social Security reform, but very little on the detailed implementation of the proposed changes. Analysts want to see the specifics so they can put a pencil to the financial impact throughout the economy.

Stocks, bonds and currencies are all trading with very little volatility. The Dow Industrials dipped eight points at the open, was higher by 44 points about two-and-a-half hours into the session, and has been treading water in a sideways chop since then. Five, ten and thirty-year treasury debt have been lower for most of the session, but down by only a tenth of a percentage point. The U.S. dollar traded lower at the open, but it didn’t last for very long as buying came in to push the dollar slightly into positive territory. The dollar index is just hovering one-fourth of one-percent higher, with all the major currencies lower by the same fractional amount. The age-old currencies of gold and silver have been held in check, especially since the weak GDP report on Friday. The dollar should have tanked with precious metals rising, but you won’t see much change until we get through the Fed-speak today, State of the Union address tonight, and the G-7 meeting this weekend in Switzerland.

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In the near-term, shortening the maturity of our national debt brings down our cost of interest payments, but for the long-term this is not good. It is the same as the government taking out a variable rate loan when they should be locking-in historically low rates for the longer-term. This tells me there is no real intent to pay back the previously borrowed money…just keep re-financing the debt. Based on Jim’s statement above, this should all come to a head in the next two years, but probably sooner than later as the quarterly refundings promise to grow much larger as each quarter passes. Hopefully we can get past all of the huge debt problems we have in this country. My biggest concern is simply that we will not come to a peaceful resolution with our foreign creditors. A non-peaceful resolution will start with currency wars, then trade wars, and finally to military conflict. The international conflicts we face today are not getting any easier, especially as we compete internationally for available energy reserves. At the same time, we depend on the international financial community to loan us $2 billion a day to keep things afloat.

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