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Raising Rates


The Fed Futures are currently discounting a 90% probability that the Fed will raise the Fed Funds rate by 25 basis points next week. You can actually make a bet on this at where the market is 90 bid at 92. The way it works is if I sell 90 and rates are not raised at the meeting (or lowered or raised by more than 25 basis points) I win $90; if rates are raised by exactly 25 basis points, I lose $10.

The 90 bid is no longer there. Obviously I don't think they will raise rates (I sold it). I certainly think the Fed wants to in order to persuade the public that things are "business as usual", that the economy is "strong" and to remove "angst" from financial markets that "things aren't quite right" (the sooner this country gets out of a negative real rate policy the better). But in the end, I don't think they (we) can. I don't think things are quite right.

Whether the Fed raises rates or not depends a lot on the employment number tomorrow: if it is near consensus or stronger the Fed may take the chance of raising rates and making an error in economics in order to perpetuate the psychology that they have been able to create. I think it shows just how important they think this psychology is.

If they don't raise rates, look for the dollar to fall and gold to rise. Bonds should catch a bid initially, then fade. I have no idea how stocks will react. Be sure that if the Fed does not raise rates they will have a "good explanation" such as the market has already done their job.

Betting on rates is a loser's game, but with nine to one odds I think it is a good bet.

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