Tuesday, August 7, 2007

Pushing on a String?

There is an old expression that used to be heard a lot in connection with Federal Reserve monetary policy. It is the term "pushing on a string." So what does it mean? Well, take a string and thrown it down randomly on a table and then try pushing it. What happens? Nothing.

The market is convinced that the Federal Reserve will come to the rescue like Greenspan did in the old days and change the wording of its statement today, or in a best case scenario actually cut rates. But does it really matter what they do? They say a picture is worth a thousand words so look at this chart from The Wall Street Journal today.

The yield on the ten-year declines 40 basis points yet mortgage rates increase 40 basis points. Now granted, the Federal Reserve doesn't control long-term rates, only short-term rates, but the scenario here could still hold. If banks contract credit, then it doesn't matter what the Fed does. Also, keep in mind that this divergence in loan spreads is happening in the business loan market as well.

Keep your eye on the Federal Reserve Senior Loan Officer Opinion Survey. It is a quarterly survey of, you guessed it, Senior Loan Officers. The next one is due out very soon and can be found here:

Senior Loan Officer Opinion Survey

One of the questions they ask to the lenders is whether they have tightened lending standards. This should give us confirming evidence that the credit contraction is raging away in the market for commercial and industrial loans.

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