Thursday’s Federal Reserve decision to raise the discount rate, the interest rate banks pay to borrow from the Fed, may not be the “no big thing” that chairman Ben Bernanke and the financial markets (so far) say it is.
The minutes of the January 14 meeting of the Federal Reserve’s board of governors and the regional Federal Reserve presidents released today, February 23, show that interest rate policy hawks may be driving Fed policy faster than Bernanke publicly acknowledges.
Thomas Hoenig, president of the Kansas City Fed, and James Bullard, president of the St. Louis Fed, emerge from the minutes as the committee’s most vocal advocates of moving interest rates back to normal in relatively quick order.
Hoenig, who got his voting seat back in January with the Fed’s normal rotation among regional Fed presidents, and Bullard voted at the January 14 meeting to raise the discount rate from 0.5% to 0.75%. The rest of the group disagreed and left the discount rate where it was.
Yet it was exactly the Hoenig and Bullard position that the Fed adopted on February 18 when in between meetings of the interest-rate setting Open Market Committee, the U.S. central bank raised interest rates.
Fed chairman Bernanke will testify in Congress tomorrow and he’s expected to repeat his pledge to keep interest rates low “for an extended period” and to argue that the increase in the discount rate doesn’t mean that the Federal Reserve intends to raise its benchmark interest rate anytime soon.
But the minutes show that objections to the “for an extended period” promise is rising. Two Fed members in dissent hardly makes a majority but two—with voting powers–is still a lot more than were urging higher interest rates just a couple of months ago.
The wages I pay my handyman who does work on my apartment building.
Gasoline.
My electric bill, my gas bill, 2 stroke oil for my chain saw. Potato chipps. a bag of potatoes.
Spinach at the grocery store,, was 49 cents in 1998, it is now over 2 dollars. Now I never buy spinach, instead I pick dandylion greens from my lawn.
The cost of wheat for my home made bread, the price of rye has gone out of sight !
swiss cheese.
Hum, well, I sold a house in year 2002.
Payments for 30 years.
I decided to live on the payment, it was easy and it lasted to the end of the month. Years passed, now we are in year 2010. That same payment now lasts over 2 weeks, but almost never to 3 weeks.
What has gone up since you ask. Well, I’d guess car tires, my property taxes, my car licence tabs, cheese, gasoline, my electric bill, maple syrup has gone out of sight, hamburger, the price of a magazine at the news stand, an airline fare, the price of gold and silver, the cost of water pipes, steel tueb for the airplane I am building, tires for my bike..
Chocolate has gone out of sight !
Candy bars.
Roast beef at the deli.
I suppose I could go on…
pdxappraiser,
Good question. Keep in mind, when a private debt is properly paid off, that money is now the financial institution’s money, to be spent or re-loaned or reserved (i.e. the banking equivalent of burying it in a mason jar in the back yard). On the other hand, if the private debt is written off (i.e. a mortgagee walks away from their house), then the financial institution has to pull money from it’s reserves to cover the actual loss (in the mortgagee case, it would be the difference between what the bank could re-sell the house for, and the total amount of their mortgage, with any amount over the mortgage and any fees to go to the mortgagee).
EdMcGon
The Fed has been increasing the money supply with increasing public debt, but at the same time private debt is falling due to bank charge-offs. Is it possible that private debt is falling faster that public debt is increasing, resulting in a contraction of the money supply, and thus deflation? This is what Harry is predicting in The Great Depression Ahead.
Verizon (VZ) at support with 6.7% yield.
Can’t get any better. Going once… Going twice…
robert1234,
1. Since when has life got more expensive? 1 year, 2 years, 5 years?
2. If you go through your monthly budget, do you see any major increase in items other than food and energy? Can you give examples? Do you live in a city or in the country? Thanks.
I try to live on a fixted income.
I used to be able to just get thru the month, on that income. Now I get to 2 weeks, and 4 days, and that income is spent, then I dip savings, or I sell stocks to finish the month.
Is there inflation,,, yes.
Jim,
diddo on terryw’s question. In particular, I thought it was interesting that he’s backed out of oil and upped his stake in IRM, Iron Mountain …a data storage play. Is he following Gates? Any thoughts on these moves in light of the in depth perspectives you’ve developed on the market over the past couple of weeks?
Hi Jim whats your take on Warren’s new holdings?
http://seekingalpha.com/article/189645-warren-buffett-discloses-latest-holdings
I eat a lot of eggs. (I must get my cholesterol level measured.) Because the prices of eggs are falling, I believe there is deflation in this country.
Those who believe there is inflation (like this guy: Prices are rising fast, even if the CPI isn’t, http://www.marketwatch.com/story/inflation-is-moving-faster-than-it-looks-2010-02-23) must be eating a lot of chicken. Not only do they eat the bird, instead of its eggs, they don’t believe CPI either!
This debate has turned into the climate change debate. Those who deny climate change must be looking at the snow storms at the East Coast and could not understand why these bone-headed liberals insist on global warming.
Ried Thunberg ICAP research
(ex federal reserve folks)
If it walks like a duck, quacks like a duck, and looks like a duck, it is a good bet it is a duck.
A senior Fed official, probably Bernanke himself, must have asked the District Bank presidents to call a meeting of the directors of their respective banks and ask for, or demand, they request a hike in their bank’s discount rate. That all 12 District Banks had submitted requests for approval of an identical 25 bp hike in their discount rate was not coincidental.
The European Union could disintegrate given the incongruity of one central bank and multiple fiscal policies, let alone multiple political parties. The euro is already under pressure. Raising the discount rate will only add to the pressure.
Professionally it behooves Bernanke to be forthright and take the heat (criticism) than to be sneaky and do it afterwards. But investors from now on will be ultra sensitive to economic data reflecting strength, and such are likely to significantly pressure Treasury prices. Indeed, federal funds futures already have upped the odds of the federal funds rate target being hiked at the September FOMC meeting.
Jim,
I will admit to being a bit torn on the whole “inflation/deflation” argument. Sure, the government dumped boatloads of cash, but how much of that cash is now sitting in bank reserves right now (after the government increased the reserve requirements)? Plus with banks sitting on large cash hordes waiting to vulture business from failing banks, there is a TON of cash sitting economically inactive.
From my perspective, I see parts of the economy deflating (i.e. real estate) while other parts are inflating (i.e. production and commodities). I think the risk of inflation is there, but the flow of funds into the economy seems to be blocked. Are the funds going to find a backdoor into the economy? Or will we see absolutely none of the supposed “stimulus” funds?
Personally, I’m not feeling very “stimulated” by our government’s actions.
*fund
Hey Jim. Couple off topics. The “Price Then” for CTRP in your watch list needs to be updated for a 2:1 stock split on Jan 21st -ish.
Also, Matthews came out with a China Dividend fun a couple months back that might be worth looking into for your Dividend Income Portfolio. Don’t know much about it yet.