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Maybe the Fed has already Eased Monetary Conditions
Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: May 16th, 2007 at 4:00 pm EST
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We’ve been witness to an odd situation for many months…an inverted yield curve. Odd…because it’s not often that interest rates can be static for so long. Further, the bond market and the Fed typical think in synch. For months the two sides have been shown different legions…the Fed being an inflation fighter has been working to keep price increases at bay…while the bond market, deftly afraid of inflation…is more concerned about an economic slowdown. In fact, bond traders are worried that without a rate hike a recession is inevitable. This fear is very realistic. However, I may have found evidence that the Fed is in their court…and very well may have started the easing process.
An indicator for short term borrowing I follow is the IRX, or short term interest rate. It’s a composite of shorter term paper similar to the fed funds rate. While sitting over 5% in late February, the yield has come down dramatically to become nearly aligned with the 10 year rate. In fact, it’s below the long bond yield for the first time in many months! Is this the Fed’s work? Most like it is, yes. We’ll have to be attentive to the upcoming data, but it wouldn’t surprise me if the Fed has suddenly shifted gears to focus on the slumping economy. A second quarter growth estimate appears to be 2% or less, which will be the second straight quarter of below trend growth. If that should continue the economy is most assuredly going to fall into a slump, if not full blown recession. Let’s hope the Fed is looking at this situation carefully and is not to late in their response.
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Bob Lang, Economics, Stock Market, Trading
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