Monday, June 8, 2009

Ritholtz Nicely Summarizes the Fed's New Conundrum

There has been a lot of debate as to how to interpret the rise in long-term interest rates, some of which I have noted here on this blog. Barry Ritholtz provides a nice summary:

The Bond sell off, which has been sending rates appreciably higher, is being caused by two distinctly different camps. The first are those who believe that the recession has crested and is coming to an end, that global growth will soon resume, and the Fed will therefore be raising rates.This is the Green Shoot crowd.

The other camp sneers at the Green shooters, but does not disagree with their conclusion that the Fed will soon be tightening. This is the inflation camp, and includes the gold bugs, commodity bulls, dollar bears, and hyper-inflationistas.

With Oil up 100% for the year, and the Dollar down nearly 10% from its recent peak, I find this group harder to disagree with. The irony is that each sees the Fed tightening and rates going higher. This is the conundrum the Fed finds itself in . . .[emphasis added]

Note, that even the Fed is reportedly perplexed by this development. For a longer discussion of this debate see Daniel Gross.

1 comment:

  1. I will admit to being in the camp that sees this as more of a return to normalcy:

    http://everydayecon.wordpress.com/2009/06/04/should-we-fear-rising-bond-yields/

    However, that is not to say that I underestimate the potential for high inflation.

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