Via the NY Times:
One school of thought holds that low bond yields are a harbinger of slowing economic growth, which would reduce demand for credit in the future. Another school holds that global investors have lower inflation expectations than in the past, which reduces the risk of holding long-term bonds. If either theory is correct, the Federal Reserve would have less need to fend off inflation and could stop raising short-term rates at a much lower level than in the past - perhaps below 4 percent.
But yet another theory holds that long-term interest rates may have been depressed by other factors, including a "savings glut" around the world and efforts by Asian central banks to keep the value of their currencies down by buying United States Treasury securities.
If that is true, the flood of foreign money into the country could be diluting the Fed's effort to prevent inflation. That would imply that the Fed needs to raise rates more than many investors are expecting.
...
Wall Street economists are as divided as Fed officials about the proper interpretation.
James Glassman, a senior economist at J.P. Morgan, contends that long-term interest rates reflect the deflationary effects of globalization. "If you think of this in economic terms, East Asia and Nafta have been annexed to the United States. It looks like an economy that has far more excess capacity. Overnight, decisions by the Chinese government are releasing huge numbers of Chinese laborers. That means more excess capacity and a longer time to get back to full employment."
What does this mean for this week's FOMC meeting? The bond market will probably be parsing the words in the statement pretty carefully. Guessing what the wording will be ahead of time is a tough game to play, and I'm not going to do that this time. Back in March it seemed like the market sort of got its signals crossed. Hopefully the statement will be clear enough so that won't happen again. Of course the statements have changed incrementally over the last year, so any sudden change would raise eyebrows. That's the downside of transparency.
Small price to pay.
Oh, and I think "measured pace" stays.
See also Tim Duy's Fed watch at Economist's View.
Blogging hiatus begins today. I'll be back in a few days, hopefully around the weekend. Enjoy the rest of the week.
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