The headline of this post “Is it time to raise the prime rate?” needs to be seriously considered. The cutting of the Prime rate has devalued our dollar and how much does it really help the average person. Now really think about this before you answer. The “prime rate” I am speaking of the Central Banks prime rate. This is the rate that banks get when they borrow money from the Fed’s / Central Bank. This is not a public offering. With inflation starting to run out of control it is time to raise the prime rate and stop this.
The positives of cutting the prime rate were to help the banks to recover from the mortgage meltdown. The negative of cutting the prime rate is money that was put into the commodities market is going to meltdown. This is a real problem as the majority is retirement fund money so you can only imagine what this impact will be. Our biggest problem is that we are still oil driven economy. With the dollar devaluation it takes more of our dollar to purchase the same oil.
The headline PCE number is on fire, showing overall inflation climbing 0.8% for June – the highest jump in 27 years and left the year-over-year headline reading at a beefy 4.1%. The Core PCE, which excludes food and energy, jumped 0.3% in June, which left the year-over-year Core PCE at a heated 2.3%. This is up from last month’s reading of 2.1% and above the Fed’s comfort zone of 1 – 2%. Other components of the report, Personal Income and Spending, were reported near expectations and garnered little attention, especially in light of the hot inflation readings. These stubbornly high consumer inflation readings continue to apply pressure on the Fed, which must weigh future monetary policy decisions amidst a sluggish economy and weak labor market.
Fed Chairman Ben Bernanke has a tuff job ahead of him. It is my option that Former Fed Chairman Alan Greenspan got out when the getting was good. Based upon what has happened to the economy Greenspan’s retirement or escape could not have be better timed. Bernanke will no doubt come under heavy fire in the media soon as they continue to be no help when informing us all. Misinformation is a real problem. I would rather have a watch that did not tell time than a watch that told me the wrong time.
The Feds are meeting today and tomorrow at 2:15pm ET will announce their interest rate decision and policy statement. We expect the Fed to keep the Fed Funds rate at 2.0% for now although we expect dissention amongst the voting members. Inflation hawks like Philly Fed President “Three Swing” Charlie Plosser will likely call for a rate hike to fight inflation. Currently, the Fed Fund Futures suggest a 93% probability there will be no change in rates, and a 7% probability of a 25bp rate hike.
Fundamentally, inflation is pressuring Mortgage Bonds lower and this pressure will keep mortgage rates up which.