Does the Fed really want rates to rise this fast?

The 10-year Treasury yield approaches 2.9% as investors worry about the Fed slowing its bond buying program. Stocks sag again to their lowest levels since July.

By Charley Blaine Aug 19, 2013 4:38PM
Federal Reserve Chairman Ben Bernanke © Richard Drew/AP PhotoUpdated: 6:12 p.m. ET

You know the old saw: "Be careful what you ask for"?

Well, just talking about tapering bond purchases, and how the Federal Reserve will still keep interest rates low, has done just the opposite.

Despite the jaw-boning by Fed Chairman Ben Bernanke, pictured, and other Fed officials, the 10-year Treasury yield, which is what mortgage rates are built on, has jumped from 1.944% in late May -- when Bernanke first began to talk about tapering, or winding down the central bank's big bond-purchasing program -- to close at 2.893% on Monday.

That's the highest yield for the 10-year Treasury security since July 28, 2011, when the yield was 2.95%.

The rise in interest rates has shaved 4.1% from the Dow Jones Industrial Average ($INDU) and 3.7% from the Standard & Poor's 500 Index ($INX) since their record closing highs on Aug. 2 -- and 2.8% from the Nasdaq Composite Index ($COMPX) since its 2013 closing high on Aug. 5. The Dow Jones Transportation Average ($DJT), watched closely as a leading indicator, has fallen 5.1% since Aug. 1.
Thanks to Monday's rate rise, the Dow closed down 71 points to 15,011. The S&P 500 was off 10 points to 1,646, and the Nasdaq fell 14 points to 3,589, a disappointing close. The index had been up as many as 21 points earlier in the day. The closes were the lowest since early-to-mid July.

It's hard to believe that anyone at the Fed saw this kind of reaction coming, much less wanted it. Bernanke has worked to keep rates low to help the modest economic recovery that began in 2009.

At the same time, the market's stress is a worry because if you see the stock market as a way at looking where the the economy will be in six months or so, the market reaction suggests the future looks, well, a touch dicey.

Rising interest rates could depress housing activity, at least in the short term. It could depress auto sales. And rising rates could cause consumers, whose confidence that they will have jobs in six months may not be very high, to think twice before buying, say, that big flat-screen television.

The tapering talk has crushed homebuilding stocks. The group has been a Wall Street darling for about two years. The iShares Dow Jones U.S. Home Construction exchange-traded fund (ITB) has fallen 20.6% since May 14. D.R. Horton (DHI) has seen its shares fall 33.7% in the same time frame. Those are bear market numbers, folks.

It has put a cap on auto stocks. Ford Motor (F) was up 35% for the year on Aug. 2. The shares are off 7.9% since. General Motors (GM) is down 7.1% since its July 24 closing high of .

The worry now is that U.S. interest rates will move so high as to pull money out of Europe, out of Asia and out of the emerging markets. The Jakarta Composite Index in Indonesia has fallen 17% since Bernanke posited the idea on May 21. India's Sensex Index is off 9.8% since a July 23 peak. Brazil's Bovespa Index is having a dreadful year and was down as much as 29% on July 3. While it has rallied up 13% since, it is still down 18.3%.

The market's slide on Monday came at the start of a busy week.

Two big economic events come on Wednesday: release of the minutes from the Federal Reserve's July meeting and the July existing-home sales report from the National Association of Realtors.

The Fed minutes will feed into the concern about the Fed and possible tapering. There is division in the Fed over whether to taper.

Also due the rest of the week: jobless claims and leading economic indicators on Thursday and new-home sales on Friday.

It's a week of big earnings as well:

On Tuesday, J.C. Penney (JCP), Home Depot (HD), Best Buy (BBY) and Barnes & Noble (BKS) report.

Wednesday brings Hewlett-Packard (HPQ), Target (TGT) and Lowe's (LOW).

On Thursday, Abercrombie & Fitch (ANF), Dollar Tree (DLTR) and Sears Holdings (SHLD) are scheduled.

Due on Friday are Ann (ANN) and Foot Locker (FL).

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32Comments
Aug 19, 2013 8:00PM
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To make this very simple to everyone, the U. S. needs to sell treasury bonds to get the bucks to pay the bills, but we have no buyers or very few, so the U. S. gov found a buyer of the last resort, the federal reserve, they can print up worthless money to buy the bonds, FED Chairman Bernanke knows that if he stops the printing , the stock and bond markets will crash, but if he keeps printing something even worse will happen.  Either way, be prepared
Aug 19, 2013 5:45PM
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Kind of lends credence to the argument that the FED does not ultimately control anything,
but that the bond market crowd, AKA Vigilantes, do.   Unfortunately this theme is inconsistent
with the concept of the FED being the major dominant "matrix"  of the interest rate.  

Aug 19, 2013 7:02PM
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The fed should have only three jobs.

 

1. Maintain an accurate and honest CPI.

 

2. Keep the real inflation rate between a deflationary 1% and 0% inflation (no more inflation). This will increase the purchasing power of the consumer. Also, this will bring real earnings to saving. If, savers can earn real income on savings, interest rates will stay low.  Also, it will increase the value of the dollar. This would move money to America (an estimate 5 trillion dollars).

 

3. Replace the fed with a computer program ASAP.

Aug 19, 2013 10:00PM
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The title of the column sounds so naive.  Of course, the Fed doesn't want interest rates to rise this fast.  The Fed doesn't want rates to rise at all!  Quite a few bloggers here sense what Charley Blaine does not, which is that Ben Bernanke is LOSING CONTROL OF INTEREST RATES.  The Federal Funds Rate remains at 0%, yet the Treasury bond yields are rising.

 

Did you know that China increased its holdings of Treasuries from $1.1 trillion to $1.3 trillion only a few weeks ago?  I think this was a result of the visit of Chinese President Xi Jinping to the White House.  As the Chinese purchase of Treasuries was reported, the 10 year Treasury bond yield went down from 2.6% to 2.4%.  Less than 2 months later, it is now headed for 2.9%!

 

What nobody else has mentioned yet is that the federal government cannot withstand high interest rates.  Although it has been only a few years since the 10 year was around 4%, I don't think the government can withstand 4%, anymore.  The federal budget is likely based on ultra-low interest rates.  The funds to pay 4% interest on the 10 year bond could easily have been spent already!

 

Major American bond funds complained last winter that the Fed owns too much Treasury debt, and that the bond market will fail to exist if the Fed owns most of it.  Well, rising interest rates will force the Fed to buy much more Treasury debt. 

 

There is probably no way to prevent a bond market crash and the accompanying dollar plunge.  Foreigners who have been propping up the dollar are fed up with the Fed!  The remaining question is exactly when will the crash happen.

Aug 19, 2013 7:58PM
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What the FED does can best be described as maybe a 50/50 chance of being correct.  Look at the varied opinions just here as to what needs to be done.  There are many many different options the FED could enact and at present I think they have lost confidence in the direction they are on now.  Over the last three years we have over spent something like 6 trillion dollars and all I see now are unrealistic expectations from folks who probably thought the FED had a clue.  These folks are now resorting to a confidence game.  Yea, our future is being waged on a confidence game.  And guess what? It didn't work.
Aug 19, 2013 7:47PM
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Without bonds actually fulfilling their purpose and the collateral they are based on being volatile at best... with zillions of fake Dollars in markets flooding into a beat-to-death suppressed Main Street... with 90 million people un or under employed and no business platform capable of doing enterprise... the rates won't matter as much as the practical actions. Never before has there been this many Ivory Towers... more than likely, never again will we see as much rubble as there is about to be in order to move enough stubborn resisting administrators so we can recover the nation. Worry less about rates, think more clearly about what and who is detached from Reality, headed for a crash landing.
Aug 19, 2013 7:37PM
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Bernanke is a pawn.  End game soon...lookout.  The QE's are coming home to roost.  Keep your powder dry, don't vote for any democrats or democratic-republicans - rino's - (like chris christie and john mccain) and hope that you are able to weather inflation that would make jimmy carter blush and not destroy the US dollar.  God Bless America, down with barack obama.

Aug 20, 2013 8:39AM
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All of us who have an IQ over 70 saw this coming. We have stated for the record since the bond buying started, watch out for the addiction to occur and  then brace yourself for the withdrawals. It is going to be worse than 2008.
Aug 20, 2013 6:28AM
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The Fed is not about to do anything that would upset a economy. That would be in there worst interest. The only people who gain from making believe this will derail a economy are the market manipulaters!!
Aug 20, 2013 9:33AM
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New Dollars for Old Dollars !  New Dollars for Old Dollars ! Get your New Dollars ! Free haircut with each claim.

Aug 20, 2013 9:38AM
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We saw the dot bomb,  kept buying, we saw the housing bubble, kept buying, we see Q'e and we keep....... what ever comes next what ever its called, we'll still keep buying!

Aug 19, 2013 6:52PM
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The author blames Ben for even acknowledging tapering? Please don't mention the Detroit effect.
Aug 19, 2013 7:07PM
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The fed has no choose but to raise interest rates and they have to raise them fast. Inflation is coming on with a vengeance. Consumer buying power is not increasing and inflation will kill our economy and do it quick.
Aug 20, 2013 10:25AM
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We've watch this never-ending propping up of the markets since 2008...we're 5 years into this puppy and I've decide this puppy can live forever...we really can print our way to green shoot prosperity. We've done it...we know how to control our dollar, create jobs and fix the housing market. With continuing QE the baby boomers and generation X,Y,Z can retire wonderfully with rock-solid 401k's. I bow on one knee to Bernanke as his team....we've won the battle...I had been guilty of disbelieving....we really can make the numbers be anything we want and we don't have to pay for it. We're America...eveyone loves our money...and we're grade AAA on derivatives because we have a printing press. I wish we could have taught this to weimar and zimbabwe, nobody had to suffer. Nobody had to suffer, they could have received life saving benefits....everyone's life is important. Children in Zimbabwe are mining for gold in dangerous conditions instead of being in school...why can't we take our Bernanke team of experts down there and make it like America too? We can re-write the book on controlling and stabilizing markets...so every country can prosper.
Aug 20, 2013 7:51AM
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Big Banks along with much of the U.S. media which are now owned by big conglomerates that also own big financial company's that loan money want interest rates to go up, because they make more loaning money at higher interest rates. They do not care about the U.S.  jobless rates or the U.S. economy. Their jaw-boning for higher interest rates by is for purely selfish reasons. They claim higher interest rates are good for older people on fixed incomes when just the opposite is true. Older people with fixed incomes generally own mostly bonds. Their Bond portfolios get creamed when interest rates go up and they loose principal big time. Be careful who you believe re: interest rates.   
Aug 19, 2013 6:35PM
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Ex-Re....The only way you are going to see continuance of Bernanke's level headedness, is if Janet Yellen gets appointed FED Chief; Instead of Larry Summers...

I'm hoping Obama isn't stupid.

But Republicans will approve Summer's appointment...

And fight like hell to keep Yellen out.

Aug 19, 2013 5:58PM
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is Charley Blaine really that ignorant??? The bond market determines Treasury yields, not the Fed. My goodness.
Aug 19, 2013 6:10PM
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Don`t underestimate big Ben.I just hope his replacement is that good.I`m still counting

my money in this market.

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