Something doesn't compute here

[mastein]

Ok, all the Greenspanish I am reading says that the FOMC will in fact raise rates by 25 basis points today. I have several reasons why this is a bad idea.

1) Something that same group didn't realize 30 years ago it doesn't now. Oil is the inflation driver with everything else either sputtering or going in reverse. Those LEIs include ISM, Michigan sentiment and total unemployment (including discouraged workers).

2) The 10 yr. bond is only 25 basis points up from its lows when the Fed funds rate was at 1%. The FOMC setting the target rate of 1.75 would bring an imbalance to the market.

Comments? Please pick my arguments apart. I want to think there is something I am missing, besides the political equivalent of whistling through a graveyard at night.

[papau]

1. Greenspan can not affect 10 year rate

On point one - cheap labor imports is keeping inflation down - and oil is acting like a tax.

But the neutral rate - where the curve is not "steep", and the Fed is not either hurting or helping the economy or inflation or building up one of a dozen pressure points - is around 4%

Going to 1.75 on the way to 2.5 next summer will have no effect.

However - each rise or cut in the Fed rate has an appearance value. So in this respect Michigan sentiment may be affected which might affect consumption which might slow GDP growth. But the effect would be several orders below the effect of the deficit, the tax slant, lack of union power, lack of liberal power, the effect of oil price level. At least that is what the models imply.