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Daily Market Commentary

After posting some significant gains yesterday, Treasuries are starting the day lower despite the news out of ML.  It appears the market reactions to last night's write-down happened before the announcement.  The S&P Investment Banking index dropped 5.5% and BKX banking index dropped 5% yesterday, while bonds rallied.  Credit Default Swaps also rallied sharply for ML and Lehman....  it's almost like the market knew.

Fed governor Mishkin is calling for specific inflation targeting, much like many central banks (including the BoC).  He said:

"I believe that the science of monetary policy indicates that the FOMC needs to go even further,"  as he argued for greater FOMC communication, and added  "The FOMC should lengthen the horizons of its projections, reach a consensus on a specific numerical value for the mandate-consistent inflation rate, and indicate that this consensus value would be modified only for good scientific reasons,"

Last time we checked, Economics was a art, not a science, but we tend to agree with Mishkin regardless.  Greater FOMC transparency would always be a good thing.  We have not had a chance to see if targeting works since many central banks have adopted it, but it would at least give the market a boundary above which they would know that the Fed will get aggressive.



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