Fed to Keep Interest Rates Unchanged Until 2011?

The currencies traded in a tight range yesterday, with a brief mini-rally in euros (EUR), as the single unit rallied to 1.20, but that was short-lived. The rumor going around was that the Swiss National Bank (SNB) was intervening…

Do you remember last week, when I told you how the Swiss franc (CHF) was trading at an all-time high vesus the euro? Well, the SNB said, “Enough”! And according to the rumors, they sold francs and bought euros…

Now, that would explain the quick run-up to 1.20 for the euro, but if the SNB was selling francs, it sure wasn’t being seen in the price of francs, as francs rallied too!

And the Swiss franc has really been the belle of the ball lately (outside of dollars and yen (JPY))… I told you about a week ago how the Swiss franc was viewed as a “safe haven” currency too, and now, we’re seeing that the currency participants “buy into that thought.”

You know… I’ve noticed quite a few economists and pundits are jumping on my bandwagon that the Fed can’t and won’t raise interest rates this year… I was reading last night about how the Fed sees no inflation in their near future, and with the persistent unemployment problem here in the US the Fed sees no other choice but to keep interest rates at historical lows… In addition, I think the Fed’s decision to keep rates unchanged will be more tied to the fact that they are sitting on a mountain of toxic waste bonds that would get even uglier should rates in the US go higher.

However, having said all that… Fed Head, Hoenig, was speaking yesterday, and said that interest rates should reach 1% by September… Let’s see if he actually votes that way!

While we’re walking in these circles… This week the Treasury will auction $ 36 billion 3-year notes, $21 billion 10-yr notes, and $13 billion 30-year bonds raising $56 billion in new cash. There have been some calls recently for the US to go further out on the yield curve and lock in some of these low yields… But, think about that for a minute… Sure the US would want to do that… But, are the buyers of the Treasuries on board with locking in low yields for 30 years? I don’t think so! And thus, the Treasury has to continue issuing shorter term Treasuries to satisfy the buyers’ demands…

Did you see Marc Faber addressing the Mises Institute?

He takes on the “deficits don’t matter” nonsense by saying, something like, “Well if deficits don’t matter, then why do we have to have taxes? We can just borrow all the money.”

Thanks to a reader who sent me that info… Marc hit the nail on the head there, eh?

OK… Reserve Bank of Australia (RBA) Governor Stevens spoke last night, following a weak print of consumer confidence, and once again warned Australians to not return to the spending levels of past years… Stevens also talked about Australia’s strong fiscal position and sound banking system. And then finished with a little ditty about how Aussie interest rates are not really that high compared to the past decade or two.

Sounds like a good speech by a central banker, eh? Unfortunately, the speech did little to support the Aussie dollar (AUD)… The Aussie dollar was the worst performer overnight, but again, we’re talking about tight ranges for the currencies.

Tonight, the Reserve Bank of New Zealand (RBNZ) meets to discuss rates… And since I’ve been calling for a rate hike by the RBNZ for a couple of months now, the actual news of the rate hike will be a non-event for me… I expect though, that the RBNZ will issue a statement following the rate hike, and try to water down the hike… They’ll probably tell us something like the rate hike cycle they are now entering will not be hot and heavy, so don’t look for rate hikes at every subsequent meeting…

Just trying to keep the sharks from circling, folks… That’s all the RBNZ will be doing this afternoon… We’ll have to see if the markets believe them or not!

Guess what The Washington Post is reporting this morning about Greece? Or rather… Guess what country that has a HUGE war chest of reserves, is swooping in to help Greece? That’s right… China! So, while everyone else has jammed the exit door with bodies trying to get out of Greece, the Chinese are “helping out”… Hmmm… Sounds like a good plan for the Chinese to me!

Well… The data cupboard will begin to open up all over the map today… And Brazil kicked it off with a very strong first quarter GDP print of 9%! WOW! That’s the strongest quarter of economic growth for Brazil in more than a decade! The Brazilian real (BRL) got a nice boost from this print, as it should have! I suspect this will get the Brazilian National Bank back to the rate hike table very soon…

I saw last night that Estonia was approved for acceptance to the euro… This makes 17 countries now a party of the euro… I remember eight years ago or so, writing about how I believed there would eventually be 25 members of the euro, and they would have combined economies larger than the US. Well… The “membership drive” has slowed in recent times… For instance, I thought eight years ago that Hungary, Poland and the Czech Republic would have been “members” by now, for they were thought to be on the “fast track” to euro acceptance… I still believe the euro will continue to expand its membership, but with the sovereign debt thing going on we’ll have to be patient… Very patient!

Well… Gold didn’t hold on to its gains that took the shiny metal to a new all-time high yesterday. I would have to think it was profit taking… And a lot of it! I saw an interview with a hedge manager, and he was asked about gold, and why he was buying it… He answered that he was buying gold because of his fear that paper currencies were in trouble, with all the debt problems of the world, and no real “plan” to correct the problem.

And finally, Big Ben Bernanke will speak to the Budget Committee today… I’m looking for Big Ben to “let it rip” and tell the lawmakers that their ideas of a budget are wrong, and that they had better get their financial house in order, fast! I guess we’ll have to wait-n-see what he says, eh?

Then there was this… Remember a few months ago, the president announced that he was forming a commission to address the deficit? Well, guess what? The commission that was formed to figure out how to cut the budget is over budget! YES! They’ve already spent the money that was allocated to them and more! Now, that’s funny, I don’t care who you are! It’s also sad… Sort of like the “comedy/tragedy masks.”

To recap… The currencies traded in a tight range with a brief mini-rally in the euro that was rumored to be SNB intervention to break the strength of the franc versus the euro… The rally didn’t last long, and we’re back to the same levels as yesterday. Brazilian first quarter GDP was 9%! China is stepping in to help Greece. The RBNZ will meet this afternoon and hike rates. And the Treasury has a boat-load of debt to auction again this week.

Chuck Butler
for The Daily Reckoning