Notes From Underground: Will the BOE see its Shadow and spring into raising rates?

Today, Ben Bernanke went before the new sheriffs in Washington and he maintained the importance of the FED‘s dual mandate. He let Paul Ryan and his comrades unequivocably know that the dual mandate will be fulfilled. Yes, Chairman Bernanke appeared to sign on to the desire of the Republicans’ “mandate” for fiscal rectitude but that is always to be expected from a FED chairman.

The Bernanke testimony was no surprise but the 10-year note auction proved to be as good as yesterday’s three-year note auction was soft. It seems that investors all over the world find more value in a positive-yielding instrument than a flat-to-negative-yielding shorter duration note. Again, I would argue that regardless of what the FED does the TWO-YEAR U.S. TREASURY NOTE is the most overpriced piece of paper in the world. But if there is negative yield in the short dates, then it makes EQUITIES that much more appealing.

Thursday morning, the Bank of England will announce its monetary policy decision. The talk during the previous two weeks is that with inflation rising and December’s poor weather impacting weak economic performances, the MPC of the BOE would most likely begin raising rates to fulfill its price stability mandate. I have argued that those pushing for a rate rise evidently failed to read Mervyn King’s speech. It seems that Bernanke read it and was quite adamant that a FED rate increase would not affect grain crop supplies in Russia or Australia.

It makes crystal clear that King is no hurry to damp growth as long as wages in the U.K. have failed to keep up and that the middle class has been so severely punished during the last three years. The SHADOW BANKING COMMITTEE came out, and, in a 5-4 vote, specified that it would move to raise rates by 50 BASIS POINTS, which put a BID to the POUND. The rally to more than 1.62 has failed to hold but there are many analysts still thinking that the MPC will raise rates soon, but I am most certainly not in the that camp. The last MPC vote was 6-2-1, the one voting for a second QE2. Maybe the vote will go 5-3-1 tomorrow but the MPC will not raise rates for it fails to acknowledge its SHADOW.

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