Wall Street apparently won’t get the Christmas gift it dearly wants – opening the spigot for more cheap credit.
Officials at the Federal Reserve took turns yesterday shooting down any dreams of interest-rate cuts dancing in the heads of investors, with Treasury Secretary Hank Paulson also giving his nod for the empty stockings.
The unusual hints by two ranking members of the Fed briefly rattled bond markets, sending prices lower while pushing up certain benchmark rates.
The rise in interest rates started after Federal Reserve Board Governor Randall Kroszner said that the current stance of monetary policy was “appropriate” and should help get the economy through a “rough patch” next year.
Separately, William Poole, president of the Fed’s St. Louis bank and a voting member of the Fed’s policy-setting committee, said changes in the policy stance depend on the arrival of new information – which often is a code phrase for doing nothing.
In case there were any doubts about the hints, Paulson clearly laid the cards on the table following a speech in South Africa – boldly stating that the US policy is for a strong dollar, not a weak one.
Rate cuts cause a weaker dollar, while tightening credit usually brings a stronger dollar.
The White House has flip-flopped for years on weak vs. strong dollar policy, hoping to mollify advocates on both sides of the debate.
President Bush fired his then-Treasury Secretary Paul O’Neill for commenting publicly in late 2001 that the US wanted a weak dollar, which startled world markets at the time.
Analysts said the Fed is issuing a clear signal to dispel any hopes about easing credit and lowering rates.
“It seems that the Fed is setting out to calm the market down about easing prospects,” said John Spinello, Treasury bond strategist with Jefferies & Co.
A strong-dollar policy would also encourage foreign investors to sink more in US Treasury securities, or in other words, loan more to Uncle Sam and get paid back with dollars that are growing in value instead of declining against other currencies.
Treasury Department data on capital flows showed net foreign purchases of US Treasury bonds and notes rose to $26.25 billion in September, rebounding dramatically from dismal sales of $2.76 billion in August.
Meanwhile, Paulson said the White House is following a strong-dollar policy and indicated he expected the greenback to rebound.
“We have very much a strong-dollar policy . . . that’s in our nation’s interest. Our economy, like any other, goes through its ups and downs but I believe the US economy will continue to grow and its long-term strength will be reflected in our currency markets,” Paulson told a radio interviewer.