Tuesday, August 22, 2006

From Moskow, with love

FRB of Chicago president Michael Moskow said that the Fed may yet resume rate hikes if inflation gets out of hand in a speech to the McLean County Chamber of Commerce. My international economics professor from college would have called this a "candy is dandy" statement, meaning that its an obvious truth.

Taken in isolation, the quote is totally vacuous. Obviously, if inflation ramps up, the Fed will hike again. But think about the post 1994 Fed's MO. They try very very very very very very hard to not surprise the market. If they think the financial markets are missing the message, they go out and give speeches to guide the market.

Let's say, for the sake of argument, that the Fed really is pausing, and they have no intention of cutting rates any time soon. In fact, let's say that at least some members of the FOMC want to hike rates 1-2 more times for good measure. Well then, the 40bps rally in the bond market over the last 6-weeks is hardly justified. So maybe Moskow is out there to remind marketeers that the Fed is still focused on inflation, and rate cuts are not a given.

Anyway, given the incredible volatility in the 10-year today (up 1 tick, wait... up 1/2 tick), it doesn't look like traders agree with my hypothesis. But hey, disagreements make markets.