Federal Reserve Preparing For Higher Long Term Rates

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When a planet gives the appearance of being stationary in the sky from Earth’s vantage point its energies are more pronounced. Neptune represents illusion, idealism, euphoria, panic, creativity, and the world of dreams. Neptune rules interest rates, inflation, bubbles, credit, oil, and fraud.

Neptune is stationary October 29 to November 10 as it changes direction from being retrograde since May 29. While Neptune themes are more likely to dominate the news during this time, Neptune's energies are particularly prominent when it turned direct November 4. From now until May 31, 2010, Neptune’s energies will be more outwardly focused.

Neptune rules fog and cloudy conditions that obscure our ability to see clearly. In the Weekly Forecast, I predicted that there would be two changes in the FOMC statement; the Fed telegraphed it was not prepared to do either one at this time.

Although the FOMC statement was basically a reiteration of the Committee’s September 23 statement, it did contain two tiny tweaks. The Fed extended the second sentence in the third paragraph that further reinforces their justification for keeping rates at record lows. Yet the Financial Times and The Wall Street Journal viewed the addition of“including low rates of resource utilization, subdued inflation trends, and stable inflation expectations” to mean that if these conditions don’t follow the Fed’s belief of “subdued inflation for quite some time,” then the Fed will have to raise rates. (Of course it’s easy for the Fed to say inflation is “subdued” when it ignores non-discretionary spending on utilities, insurance and all types of taxes in its calculations.)

The second tweak made to the statement is that the Fed will purchase “about $175 billion of agency debt” (from Fannie Mae & Freddie Mac), $25 billion less than the Fed had previously announced. The Fed said this was due to “the limited availability of agency debt.” Saturn challenging Pluto now through February reflects the Fed contracting (Saturn) their debt (Pluto) purchases the Fed previously announced it will complete through the first quarter of 2010.

In essence the Fed has signaled it intends to keep short term rates at rock bottom while allowing long term interest rates to start to drift upward. This will push bank deposit rates as close to zero as possible while increasing lending rates, allowing banks to make a bigger profit on the spread. The Fed is reiterating that now is the time to lock in a fixed rate 30 year mortgage.

Another reason why the Fed isn’t ready to announce it is preparing to tighten comes down to politics. Fed Chairman Bernanke has yet to be reconfirmed to a second term by the Senate and it is shaping up to become a cantankerous hearing. To paraphrase former Fed Chairman Alan Greenspan, politicians never ask the Fed to raise rates. Venus in Libra exactly conjoining Bernanke’s natal Mars and Neptune yesterday reflects his willingness to act as politically accommodating as possible right now.

The challenging alignment of Saturn in Libra and Pluto in Capricorn are impacting the Fed’s natal Sun (its identity) opposite Pluto (its power) now. The Fed is under pressure to prove to Congress that it is still the best qualified and the most capable of balancing its many roles as the nation’s central bank. Saturn represents limitations and Pluto the loss of power if Congress creates the Consumer Financial Protection Agency that would remove the Fed’s ability to control consumer finance.

Pluto began affecting the Fed during 2008, exposing the Fed’s flaws that helped enable the financial crisis. The Fed’s conduct during the financial crisis and opaque arrangements has resulted in a push for transparency. From a Bloomberg news Freedom of Information Act lawsuit to a bipartisan movement in the House to pass legislation for the GAO to audit the Fed for the first time ever, the pressure is mounting to rein in the Fed’s discretion. Rep. Alan Grayson (D-FL) and Rep. Ron Paul (R-TX) wrote a letter to Senate Banking Committee Chairman Christopher Dodd requesting the Committee delay Bernanke’s confirmation hearing until the Fed releases more documentation about its financial rescues.

Today’s Wall Street Journal reports Sen. Dodd is about to unveil a bill where the Fed would not only lose their ability to regulate consumer finance, but would also be stripped of almost all bank supervision powers, replaced by a new single national bank regulator. As the WSJ observes, “under the proposal the Fed likely would emerge as a completely different agency...” Pluto represents nothing less than total transformation, and Capricorn represents government, established structures and hierarchies. What is no longer living up to its original purpose and intent must be destroyed in order to be transformed. The influence of Saturn and Pluto emphasize downsizing the Fed back to its primary focus on monetary policy – which is exactly what Sen. Dodd’s bill intends to do. The Fed’s counterargument is that without a regulatory function, the Fed cannot monitor and keep abreast of the banking system in a timely manner. The Fed’s function is to protect the banking system; therefore a regulatory role for the Fed is clearly a conflict of interest.

One job the Fed has telegraphed it does not want because it believes they can’t be identified is the responsibility for preventing asset bubbles. The Fed refuses to acknowledge its overly accommodative policies are building bubbles that if left unchecked could grow to rival the size of Jupiter before they burst.

Reading a front page story in yesterday’s Wall Street Journal (“Fears of a New Bubble as Cash Pours In”) feels like a dream where it’s 2005 again. Gold traded at $1,094 an ounce intraday yesterday, oil is hovering around $80 despite plentiful global supplies, and sugar and other commodities are at or near new highs due to money seeking higher yielding investments. Real estate in southeast Asia is booming, and global investors have poured an estimated $53 billion into emerging stock funds this year. Jupiter (foreign investment) conjoining Neptune for most of the year has rapidly expanded asset inflation. The IMF and the World Bank are worried about asset bubbles, but the Fed is not.

The overall consensus believes the Fed will not raise interest rates until at least six months from now. In addition to Saturn and Pluto, Jupiter will conjoin Uranus in the late Spring, also forming a challenging alignment to the Fed’s Sun and Pluto. If the Fed waits until their June 23, 2010 meeting to raise rates, the increase will have to be more than a quarter percent to tame the spike in inflation that is likely to occur then.

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