Black and White vs Grey meets the Federal Funds Rate

Some discussion lately about whether questions are “shades of grey,” like a typical divorce, or whether they’re “black and white” like the recent Oregon-OU “bad call.”

IMHO, all questions are black-and-white.  It’s just a matter of how many details you are able to perceive.

grey.JPG

 So, the ten-year rate is 4.60%, and the Funds rate ramains stable now at 5.25%.

We have a 65-point inverted yield curve, and nobody’s saying a damn thing about it.

Is it lagging details about how the Fed has calculated interest vis-a-vis energy prices?

Is the market trying to tell us something about the overheated housing market’s expected “landing?”

Or is it something else?

It’s “shades of grey” to me:  I can’t make out the fine details.  Can you? 

If you can, I am all ears.

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  1. Sidestepping the actual black/white vs. grey argument, (and, as an aside, thank you for spelling “grey” correctly — a pet peeve of mine) I can talk about the Fed Funds rate. A 65-point inverted yield curve is not good. At first I thought you meant 65 datapoints, as in “oh, that’s not just an interpolation failure”, but then I remembered most people interpolate yield curves linearly anyway, so I just looked on Bloomberg, and yep, he meant a 65 basis-point difference between high & low yields(56 today), but in the wrong direction (longer-term should be higher, not lower). What this tells us is that people are willing to pay more for short-term funds than longer-term ones, which generally means that they think future rates will decline, which often means that inflation will be low, which is often interpreted as an indicator of lowered growth expectations. Inverted yield curves generally predict 7 or 8 out of every 5 recessions.

    But as to what’s really going on? It’s simple, and it’s all Greenspan’s fault. The “housing bubble” isn’t really a housing bubble; it’s the symptom of a vast credit-bubble that Greenspan caused by playing Kobiyashi Maru with the banking system — his magic “make the economy go even while interest rates stay higher (pre-dotcom blowup) was the result of his obliterating reserve-requirements on all accounts except checking accounts (which never have excess balances anyway). In the long-term, the US economy is in real trouble if we don’t get things back in hand, and people who’re aware of this look at the yield curve as a harbinger of things to come. Monetary inflation has been running over 6% for years, but no-one understands this except for the bankers who’re busy whistling past our future economic graveyard while they commoditize & offload traunches and pocket their profits. If the general public is unaware of this, and not screaming about it, why would anyone care about a yield curve?

    So here’s your black & white answer: the Fed doesn’t have the political will to really fix things because A) of all the pain that the reforms would cause, B) bankers don’t want to lose their gravy trains selling products they’d never be fools enough to buy, and C) most consumers don’t understand the details but want to be approved for loans credit regardless of their real creditworthiness.

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