Thursday, June 29, 2006

Fed funds rate raised

From the Reuters UK article:

As widely expected, the central bank's policy-setting Federal Open Market Committee voted unanimously to lift the benchmark federal funds rate target a quarter-percentage point to 5.25 percent, its highest since March 2001.

In a statement announcing its action, the Fed said moderating growth should help ease price pressures, even though it held out the possibility it could extend a two-year credit tightening campaign.


Notice the emphasis on economic growth as a source of inflation. What they don't talk about is the role that money creation has in bringing about inflation. You will not hear a US central banker allude to money supply growth as the cause of inflation, although this is the classical definition. Tally up some broad money supply measure using the available statistics (now that M3 is no longer reported by the Fed) and then tell me where inflation is heading.

We can focus on "price inflation" as measured by core CPI or we can look at money and credit creation to judge liquidity in the system. I'll watch the latter and I'll look to the analysis of those who are knowledgeable enough to relay that information in a way that I can understand. This essay by Dr. Marc Faber, incorporating the work of Doug Noland and others, is an example.

The stock and bond markets rallied today on what was reasoned to be good news. Here's how Reuters summed it up:

U.S. stock and government bond prices rose and the dollar tumbled as financial markets saw the statement as suggesting chances of another boost to borrowing costs in August as lower than traders had wagered before the meeting.

By late afternoon, the blue chip Dow Jones industrial average <.DJI> surged 217.24 points, or 1.98 percent, the biggest one day percentage gain in over a year.

Well, let's see what happens on Friday.