At what path the FED may take in raising rates
>> well, fed talk, if you will, has gone from considerable period to patient to measured. here for a look at what path the fed may take in raising rates is bloomberg news editor at large tom keene with the chart of the day and an explanation for a very interesting chart. what exactly are we looking at here?
>> it’s an advance peek at monday’s chart of the day. it’s a fed funds rate which is the rate that the federal open market committee is interested in. way down here at 1% in the bottom right hand corner of the chart. really quite low. there’s a lot of talk about going up to 2% which is the green horizontal line. what we looked at is a 15-year trend rate before the recession, before the jobless recovery. then we extended that out in to the future. and we said just as one example what would it take to get back to trend by the end of 2005. that’s one path. you can see at bottom, the yellow arrows, we don’t know what path the fed will take. the answer is 4.2% just to get back to trend if you assume you are going back to the end of 2005. that’s an awful big number for people now. we are addicted to 1%, a very low rate. maybe 2%. 4.2% is a long ways from 2%.
>> seems at june 30 meeting that the quarter point increase is a foregone conclusion. what if game. what could happen possibly to see the fed reining in?
>> to be more measured or go against that, i think a slowing economy as we move through 2004 and 2005. what we hear from experts is’ job recovery slows down or dampens a bit, that would get their attention.
>> thanks, as always. appreciate the chart work. excellent stuff. and onward we go. next week we’ll get another raoegd of the consumer price index. inflation, few will, for the month of may. c.p.i. one of the leading gauges of price increases, expected to rise to half a percent, that would be .2% increase from the previous month. our next guest says that these signs of rising inflation have spurred demand for tips or treasury inflation protected securities. he is jon noonian of appleton partners. he joins us to discuss the pros and cons of what some may say a risky investment vehicle. jon, thank you for joining us. are tips risky in your opinion?
>> they certainly carry risks. i think that one of the best ways to understand the opportunities and risks that they carry is to take a look at the issue, the first issue of tips which came out seven years ago. and from the time they came out, they carried a yield of around 3 3/8. the real yield went up about 100 basis points. over that period an investor would have gotten the coupon for three years, would have gotten the inflation that was accreting. the price went down by six points. they ended up in that period with about the 10% from the coupons. over the next four years, it was the best of all worlds. the inflation was enough so that you got the benefit of the accretion of the inflation. that was about 10%. you picked up four years of coupons which was about 13%. you ended up getting a price increase because the real yield collapsed of 18 points. that was the best of all worlds.
>> are tips actually a good investment or really just an insurance policy against inflation, to protect you against inflation?
>> well, it all depends on when you buy them and what the level and shape of the real yield curve is. there is a break even rate on inflation. for example, right now on a long tips, the break even rate of inflation is about 3%. if one were to buy that and everything else staid the same and inflation came in more than 3%, you’d be a winner. if it came in less than 3%, you’d lose on that count.
>> we just said what we’re expecting for inflation next week. would you buy tips here or would it be better to sell them or avoid them?
>> well, we have not bought them for our clients. we owned some selectively several years ago. the reason we don’t own them currently is the real yield curve does not seem to warrant their ownership right now.
>> it’s interesting you talked about this as a security that is really only seven years old. of late we heard from bill gross from pimco, world’s largest bond fund manager talking up tips. has there been an increase in the supply or issuance? give us an idea of the scope of the tips market . we have 20 seconds left. i apologize for that.
>> we have 13 issues i believe we have had outstanding or have been issued since 1997. everything says that the u.s. treasury will be issuing many, many more issues in the months and years ahead.
>> jon noonan, thank you, sir. appreciate you joining us. chief investment strategist and economist with appleton partners. oil prices in new york jumped on thursday. some analysts say they’re marching back to record highs. we’ll hear why and see what that means for gasoline prices, next.
