Interest Rates and the Dollar

The monetary turmoil in the last few weeks is evident in the interest rates chart (circled). 

Click to enlarge:

The Fed's reduction in its target rate, to 4.75%, is raising a few warnings about impending inflation; as usual, though, the experts disagree.  The dollar's downward slide continues, and that could be an inflation signal—but much of the drop is due to the strong euro, and instead of signalling dollar inflation, the strengthening euro might instead induce the European central bank to drop their interest rate.  We'll see.

Here's the latest dollar chart.

Click to enlarge:

Comments

[Bob]

The price of gold used to be a harbinger of inflation and it has been on a fairly steep rise the last seven years though inflation has been muted during that time.

In this new world of global supply and demand does anyone have a good idea how to measure inflation?

[Kevin]

Bob, Steve has commented on this in the past also, but you can compare the yields of regular US treasury bonds versus their inflation-indexed equivalents.

See:
http://www.bloomberg.com/markets/rates/index.html

Compare similar maturities in the "Notes/Bonds" section versus the "Inflation Indexed Treasuries" section below that. The difference in yield pretty much indicates expected inflation during that time frame, as judged by the bond market.

Personally I think that's the best estimate of future inflation that's humanly possible today.

[Steve]

Brian Wesbury doesn't put as much faith in the TIPS spread as others do. Here's his article explaining why: http://tinyurl.com/2qazhl

It will take 6-9 months to see how it plays out. I think a lot of the disagreement results from the difference between commodity vs asset price inflation/deflation.

[Mike H]

Steve,

Brian Wesbury doesn't seem to think the Fed should have cut rates at all. Is this something you and him differ on? If I'm not mistaken, you think the 50bp cut wasn't a bad decision.

[Steve]

Hi Mike,

Mark asked that same question a few weeks ago; see my response to that in the comments below the following article: http://tinyurl.com/323y5g

[Bob]

Kevin,

I'm no economics or bond market expert though I'm not sure that the bond market, with all it's speculation, is the barometer I'm most comfortable with regarding inflation.

I'm thinking along the lines of commodity as to asset inflation when inflation is the subject. However, the latter could experience some deflation if one considers housing as the most common asset. Regarding the former, given global supply and demand, I'm still at odds at how the Fed can wrap its' arms around all of it.

[Kevin]

Heh, I don't think anyone's claiming TIPS spreads will necessarily prove over time to be ACCURATE -- it's just likely to be more consistently reliable than any other opinion or method. But of course time will tell.

Now if in time it the spreads prove to be systematically wrong in one direction and someone can explain why, that would be very interesting reading.

Incidentally, I have a hypothesis that much of the "falling dollar" can be explained by changing inflation expectations over a 30 year horizon for the dollar versus the other currencies. But lord knows I'm not actually going to bother to research that.

[rufus]

All the Fed has to do is drop .50, more, and get out of the way. Bimini would be nice.

Look, the "dollar" is ALL oil. We'll soon be shipping $1 BILLION/DAY offshore for oil. The currency can't sustain that without eventually falling.

Look at which currencies have been rising, or falling, against who. Match it up to who exports oil, imports oil, and how much. It's stone-cold "Perfect."