Tuesday, October 18, 2005


A 5.5% Fed Funds Rate?

The Daily FX has some observations on a Fed officials speech today. "As we warned yesterday, surging inflation especially on the producer price level will give the Fed a good reason to pump up the need for higher interest rates, which is the primary driver of dollar strength these days. Producer prices surged 1.9% on a monthly basis and a whopping 6.9% on an annualized basis."

"This has given the Fed even more ammo to talk up interest rates; Fed President Yellen, who is a non-voter threw out some numbers today. She said that the 'neutral rate' that everyone seems to believe that the Fed is aiming for is anywhere between 3.5%-5.5%. This is the first time that the market has even considered the possibility of 5.5% rates."

"The 5% level that the experts have been parading around already seemed a bit far-fetched, let alone 5.5%. If 5.5% rates is a really a possibility, then it’s the market that is behind the curve and not the Fed. Either way, the trajectory for rates is higher and for as long as the market thinks that rates are going up, so will the dollar."

"The Japanese Yen has fallen 6% against the dollar over the past two months, with prices pushing easily above the 115 barrier. The central bank seems to be taking this in stride, noting that they have no plans to intervene in their currency to halt its decline and in fact do not view it as a 'problem.' Why should they? As an export dependent economy, a weak currency helps to boost business for their domestic corporations."

I'm sure the Japanese are saying "Paybacks are a Beotch".

I bet it sounds almost funny with the accent, if it wasn't true-of course.
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