Wall Street thinks it has the Federal Reserve figured out.
Now all we have to do is figure out Wall Street.
Stock prices rose nicely again yesterday because the financial community is convinced that the Fed's policy-making Open Market Committee, which meets today and tomorrow, will not raise interest rates or taper off the big bond-buying/money-printing operation that has kept stock prices elevated and interest rates low (at the expense, of course, of savers).
The only problem is that interest rates have been rising anyway, and the Fed might not be in control of the situation. Borrowing costs have been jumping across the board. The 10-year bond issued by the US Treasury, for instance, is up 10 percent, to 2.17 percent, since the beginning of May.
Mortgage rates have risen to an average of 3.49 percent during that same period, up from 2.93 percent.
And there are ominous signs for the months ahead. For one thing, foreign investors in April sold a record $30.8 billion in Treasury debt. If foreigners lose faith in Washington's IOUs, then, well, it's all over.
But Wall Street doesn't seem to mind. Yesterday, the Dow Jones industrial average rose 110 points as the closely watched indicator finished above the 15,000 level that seemed in jeopardy just last week.
Why is Wall Street so happy? First off, it's summer and the thinly traded markets this time of year can usually be manipulated higher with very little volume or effort. Professional traders have taken to jacking stock prices higher before the market even opens in New York by simply loading up on stock index futures contracts. Derivatives like these make the world go round. And they make stocks go up.
Let me give you an image. We've all blown up balloons by mouth. You get the balloon to stretch to a certain point and you start to feel a little apprehensive. Then you give it one more puff. Maybe another will fit. Another?
What could make the current stock market bubble blow up in all our faces? The most likely cause will be a surprise from the Fed - but probably not this week.
Fed chairman Ben Bernanke doesn't want to raise interest rates. He'd obviously like to retreat to his old job as a Princeton University economist - probably early next year - and leave the dirty work of boosting borrowing costs to his successor.
So Bernanke and his cohorts will continue to play good cop/bad cop for as long as they can get away with it. No, the Fed won't tighten interest rates, because the economy is too weak. But, yes, it is ready to taper the "quantitative easing" money-printing operation when the time is right.
That sort of guidance is no guidance at all. The Fed will raise rates, but it won't until it has to.
A surge in inflation might turn out to be the rate villain. Last week the government announced that the producer price index rose 0.5 percent in May. An increase of only 0.1 percent had been expected.
Don't worry about it, participants in the stock market say. Food and energy were the culprits, and who has to buy them?
Or maybe an upbeat economic statistic (remember them?) will cause investors to think the demand for loans is about to rise and that money should be more expensive to borrow.
Maybe tensions in the Middle East will make Wall Street worry - perhaps even what's going on right now in Syria, where President Obama seems determined to intervene. Another war, on top of all our current national expenses and debt, might send foreign and domestic buyers of government bonds packing.
What's the most likely scenario? Just the way it's playing out now: Bond prices fall and interest rates rise because of a bunch of things, and the Fed - with not so much advance warning - decides to disengage from one of the most dangerous economic policies known to man: quantitative easing.
Whether the financial markets overreact to QE's tapering, unwinding and eventual elimination is anyone's guess. You really never know which breath into the balloon will be one too many.
No, I haven't gotten an invitation to the Fed's big bash in Jackson Hole, Wyo., in late August. I mention it because a reader asked.
Jackson Hole is where the Fed usually tips off policy changes. But this year is different: Bernanke isn't attending because he has a previous commitment.
So why should I be invited? Not just because I appreciate nice scenery. But also because I'm proposing the only economic policy move that might get us out of our current mess: Change the rules on how Americans can use their retirement accounts so they can help spend our country out of a recession.
Forget dangerous monetary gimmicks. Let's revert to supply- demand economics. Let's increase demand, especially for houses, by giving people earlier access to their money.
I haven't checked the mail room today. Maybe my invite arrived over the weekend.
Originally published by John Crudele.
(c) 2013 The New York Post. Provided by ProQuest LLC. All rights Reserved.
Most Popular Stories
- GE Healthcare Bringing Jobs to Massachusetts
- Apple Stock Bounces Back Big Time
- Faith Groups Divest From Fossil Fuels
- Spiders Get Bigger, Reproduce Faster in Cities
- James Foley Beheading Video Is Real Thing: White House
- Entrepreneur Contest Announced in Idaho
- Why BofA Won't Pay $17 Billion After All
- Notes From the July FOMC Meeting
- James Foley Killer Could Be ID'd Via Social Media, Voice Recognition
- Obama Weighs Move on Legal Immigration