Ask her out and treat her like a lady
her she's the one you're dreaming of
Take her in your arms and
never let her go
Don't you know
That step by step
You'll win her love
- Eddie Rabbit
Planning out your actions is always good advice. However, when opposing
parties get to react with free will, which they always do, plans beyond step one
are rarely the correct course. This Yiddish proverb says it best: Man plans, God
When the Fed is moving interest rates — either up or down — the scheduled
gatherings of the Federal Open Market Committee (FOMC) dominate headlines.
Leading up to these meetings, pundits speculate on whether and how much the Fed
will move rates and ultimately where they will stop.
For the last 11 meetings, however, the Fed has held pat, targeting a rate
between 0 and 0.25 percent. Furthermore, it continues to project retention of
this target for an "extended period" of time. But what is meant by this
To understand the Fed's motives for including this phrase, one must consider
the many levels of thinking that occur in the marketplace. For a simple example,
allow me to use a poker game where bluffing is an important part of the mental
gymnastics that take place. First, there is the way things are today: What hand
do I have and is it a good hand? Second, what hand do I think my opponent has
and do they think their hand is a good hand? Third, what hand do I think my
opponent thinks that I have? Fourth, what hand do I think my opponent thinks
that I think that he has? And so on.
It is the same with the Fed when it determines where to set interest rates.
With so many people betting so much money on the direction of rates, there's
reason to believe this game is being played at an infinite level.
Given these circumstances, it might be that the Fed must keep this "extended
period" language in their lexicon until just before raising interest rates. To
envision this, imagine how investors will react once this language is
While investors are playing the same game — make no mistake, they are — they
will interpret the dropping of this language to mean interest rate hikes are on
the way very soon. This will cause them to trade out of fixed income securities,
driving market-based yields upward and immediately tightening credit on term
The Fed will have tightened simply by dropping the phrase "extended period"
and without actually increasing any interest rates.
Realizing that simply dropping this language creates a very real and
effectual tightening itself, the Fed will wait until the underlying economy
begins to grow and potential perceived inflation occurs before even changing
this language. At that point, real inflationary pressures will be right around
the corner and it will be clear actual interest rate increases will be
So, what is an extended period? By my logic, not very long. However, the Fed
could easily repeat this phrase for the remainder of 2010.
The FOMC met last week and left interest rates unchanged as expected. In
addition, they retained the "extended period" language in their official
statement communicating that a rate increase is not near. Unfortunately, the
definition of "extended" is up for interpretation.
Core inflation measures in both the producer and consumer sectors were near
zero in February, while rising just over 1.0 percent over the past year. Energy
prices in both sectors detracted from inflation during the month.
FDIC Chairman Sheila Bair said in a speech Friday that they are considering
extending the insurance program for deposit accounts. Approximately 6,900 banks
originally signed up for the so-called TAG program and the concern is whether
funding for regional banks will dry up without this extended insurance.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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