10-Yr Treasuries Sell Off, Pushing Rates Higher

What an interesting phenomenon that even while the Fed continues to promise lower interest rates, 10 year treasuries continue to sell heavily, pushing real interest rates higher. In this daily chart of the 10-year treasury futures, the circled volume indicator shows heavy selling and interest rates remaining relatively flat to slightly higher since they (interest rates) bottomed 1/23/08.

Commodity Inflation Showing Strength Today

Meanwhile, commodity prices across the board have surged again today on the weakness of the USD that has resulted as a market reaction to the Fed Chairman's comments this morning before the US Senate Banking Committee. Chart 2 shows the USD Index 120-minute chart sinking over the past few days with the expectation of further rates cuts emerging from the Fed's dovish tone.

All the major commodities, including crude oil (my last posting), sugar, cotton, coffee, cocoa, and all the grains (corn, wheat, soybeans, etc.) have all moved higher today with the expectation of a continued blind eye by the Fed toward price inflation. This, as evidenced in my previous posting earlier today showing the grains complex surging significantly and universally higher this morning. Similar charts could be posted for most other commodity prices, including all the ones I have mentioned above. It wouldn't matter which chart I posted, since they all appear similar today.

Fed Denial of Inflation

One certainly must wonder about the wisdom of ignoring inflation on a determined path to further weaken the currency, when it (inflation) continues to push persistently higher even in the path of recessionary fears. Economics 101 teaches that inflation wanes with lower commodity prices as a recession dampens demand. The Fed leadership must know that if the US economy rebounds in the second half of 2008, the surging demand (as the economy quickens again) will only increase inflation pressures. Still, they continue a mantra of expecting inflation to moderate, as if they can simply talk down inflation and its expectations, while simply ignoring its reality. The markets just don't believe the mantra any more! If inflation is this high during a weak economy, then what should be expected if the economy rebounds later? Hyperinflation?

It is also a fascinating phenomenon that while all the central banks of the industrialized Western nations continue to express concern about inflation and talk of higher interest rates, with their stronger currencies, why is the central bank of the United States, with its progressively weaker currency, the lone voice in the wilderness claiming that inflation is contained or low?

By now, nearly everyone who knows of the changes in the calculation of CPI a few years ago, must realize that the government's methodology for calculating inflation is seriously flawed, understating the true inflation rate to the point of laughability. Even if someone weren't aware, one only need go to the grocery store (or buy anything but a house) to realize that inflation is rising rapidly. Can anyone be of such mental dullness that they can't see inflation -- except a few Fed heads? This mental blindness suggests an intentional benightedness by them. Certainly, Fed governors Plosser and Lacker have the intellectual acuity to have seen and acknowledged it within the past week or so. No doubt they have expressed those concerns to the balance of the FOMC.

An Intentional Blind Eye to Inflation?

This appears to underscore a strong concern about the credibility of the Fed and its motives for seeming to turn a blind eye to the reality that everyone else, including the commodities markets, sees. This question of motive, and a therefore unacknowledged agenda at the Fed, is an honest response, too, given past statements by Mr. Bernanke acknowledging the influence of Fed monetary easing on stoking the fires of inflation. Doesn't Mr. Bernanke remember his own famous speech (he must regret that one by now) in 2002 about intentionally inflating prices through cash helicopter drops (like the just-signed "stimulus" package passed by Congress and signed by the President this week)? If not, he can read the speech again on his own Fed website. That's where I found it recently. Why would he now deny the very inflationary influence that he boasted about just a few years ago? A selective memory, indeed.
But the better question is, "Why is he now denying the inflation he formerly blustered and gloated the Fed could create?"

"The question speaks to motive, your honor!"