Notes From Underground

Paragraphs  two and three of the FOMC statement remind all concerned that the FED has a dual mandate. In fulfilling that statutory mandate, the FED is using all tools at its disposal to fulfill that mandate. Paragraph two said, “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.” Then in paragraph three it said: “To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate….”

Again, QE2 isn’t the FED‘s fault. We are just following our directive. This is bothersome for it’s as if the FED is pointing the blame toward Congress as the feeling seems that they are being maligned in the popular press. Is Bernanke trying to throw the ball back in Ron Paul’s hands and let him move to change the dual mandates and therefore rid the FED of any policy mistakes? The new session of Congress will provide some insight into this and the Congressional testimony of the FED CHAIRMAN will be of great interest.

An interesting development post-FOMC statement was that the 2/10 curve steepened by 14 basis points which is a very large move. The curve has been steepening post November 3, even as the FED has been buying more DEBT, flying in the face of conventional wisdom. Readers of NOTES are aware that the key date on the calendar has been August 27, Bernanke’s speech in Jackson Hole. Remember the “PORTFOLIO BALANCE CHANNEL” for it has been the driver of the reallocation of money from BONDS to EQUITIES as the S&P/U.S. ratio has moved more than 30 percent since that day.

As equities have gained so dramatically, the FED has failed to keep long rates down but as I have discussed, it is in line with the “PBC” that the FED will tolerate higher rates as long as the EQUITIES provide a positive wealth effect. As long-term rates head higher, many analysts are predicting that the U.S. DOLLAR will strengthen but I caution that STEEPENING CURVES A STRONG CURRENCY DO NOT MAKE.

Yes, I am watching the DOLLAR/YEN rally with the rising 10-YEAR rates and that is most probably a result of Japanese insurance companies seeking some higher yields. The SWISS FRANC has been a stalwart performer even as U.S. long rates have moved substantially higher and as we know SWISS interest rates are as low as Japanese rates so in the realm of currencies this is a disconnect. The precious metals were also under pressure today as the higher rates bled into the mindset of a higher DOLLAR. Again, I am not in that group and would look for support levels to enter trades to support a weaker DOLLAR view based on a steepening yield curve being a negative for a currency. I know that this is not the conventional viewpoint but that is why 2+2=5 is also a BEAUTIFUL THING. Be prepared for the market to provide you with great opportunities in holiday-thin markets.

Tags: Bernanke, bonds, Congress, Debt, Dollar/Yen, dual mandate, Equities, Fed, FOMC, QE2, Ron Paul, Swiss Franc

This entry was posted on December 14, 2010 at 7:52 pm and is filed under Currency, Debt Market, Federal Reserve, FOMC. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.