My nearly 100 year long T-bill / inflation regression model suggests
the 3 mo. bill should be 2.1% presently. By the end of this year, the
model will likely provide a reading of 3.5%. The Fed is keeping it low
Measured yr/yr, inflation has been running over 2% this year. So,
with deposit rates negligible, the US dollar is again losing purchasing
power and savers are taking the hit. You have to go out 5 years on
the Treasury curve to cover the inflation nut currently. With
sovereign risk credit issues in Europe, the trade weighted dollar has
been firming on a modest flight to quality, but the underlying
fundamentals for the $ have turned weak.
The Fed is resolved to maintain its 0.0 - 0.25% policy on the FFR%.
My indicators are now at 50% in favor of a rate hike. As the economic
recovery proceeds and capacity utilization and private short term
credit demand firm up, the case will be much stronger to raise
rates. The US operating rate is now around 73.5%. Normally, the
Fed has waited until that CU% rises above 80% to increase short
rates, although it started raising the short rate in 2004, when the
operating rate hit 77%. Waiting to raise rates until capacity
utilization moves toward 80% is a longstanding Fed practice because
it is at that level when inflation, excluding energy and fuels, begins to
accelerate, and is also when capital spending can begin to outstrip
business sector internal cash flow to put added pressure on credit
demand. So, the Fed figures it still has time before it should push up
rates and is not abandoning a long held practice.
Despite the ZIRP Fed policy, the odds of serious bubbles arising are
low since the broad measures of credit-driven liquidity are barely
growing. Individuals and institutions have been drawing down
money market holdings to fund the capital markets, but that is an
exercise with considerable finitude.
the yield on the 1 yr Treasury has been creeping up, but it might have
to take out .75% to suggest players are sick and tired of the Fed's
ZIRP policy. 1 yr. chart.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!