Sunday, December 9, 2007

50 points next Tuesday

Thanks to Doc for the chart. The spread between the 2 year note and Fed funds rate is as wide as it's been in 17 years right now. Contrary to popular belief the Fed doesn't lead the market. They follow as you can see from this chart. With a spread this wide I'd say it's a pretty good bet the Fed is going to lower 50 basis points on Tues. Lately they have been trying to talk short term rates up so they won't have to cut as much. I think they know these easy monetary policies are going to stoke inflation and weaken the dollar just like it's done since 01 but the market is demanding this action. At some point a Fed president is going to have to break this cycle like Volker did or we will just continue to watch the dollar drop and inflation rise. Rising inflation will eventually clamp down on the global economy.