There is another interesting interest rate hike coming up this week and all of the pundit's are discussing its ramifications. The argument revolves around whether it will be bad or good for the economy.
What we are talking about is the Federal funds rate on overnight loans to banks. When the Fed funds rate was 1%, banks lined up at the window for almost free money loans. Now with the rate at 5.25 there are no lines at that window.
They have raised this rate 17 times and the 30 year bond has yet to jump a full point. In fact the 3 year bond dropped to a 4.85% interest rate. The three month treasury is at 5.13% interest and the 30 year is at 5%.
Every financial want-to-be or is-a-be floats around waiting for what Bernanke is about to do or say. The fact is, that when the Fed rate exceeded the bond rate, it no longer mattered how high they raise the rates. If the cheapest price is at Walmart, you buy at Walmart and the Fed right now is no Walmart.
The Fed figures that they have some sort of John Wayne swagger effect. Its just not there. If Bernanke walks into the bar, China is going to tell him to raise his hand for permission if he wants to use the bathroom.
What we are looking at here is an entity that at one time was very powerful. But in the computer age, a mouse click can circumvent anything that Berneke can attempt to control. With everything computerized, the overnight Fed funds rate doesn't really come in to play much. The banks have it pretty well sorted out.
What we are really looking at is a man going through the motions of, "I am in control, have faith and I will get you through this mess." No one out there will challenge his ability to push on a string. With that said, I believe that everyone in Wall Street will ride the ride, on his say so.
So what happens from here? Bernanke either raises the rates or he doesn't and the people on Wall Street will salute this guy as the new god of finance.
Doesn't really make much cents does it? If Bernanke raised rates to an absurd level of say 20% it wouldn't change the 30 year bond rate, but at that point, it would be very obvious that the Fed was no longer in the loop. The reason that they are no longer as effective, is because they are just a small part the very large global market.
Where does Bernenke fit in? He is being groomed to be the scape goat for the coming mess. Its pretty obvious that one is going to be needed soon.