First, notice the big volume day of February. Since then, prices have made new lows each week, but have closed strongly. This is a neutral sign.
Second, notice prices have retreated both of the last two weeks after reaching the same price level. This means sellers are waiting at that level.
Finally, the downward revisions to GDP are telling investors to beware, a slowdown might be coming. The Fed program to slow bank lending might be working.
In the face of a potential slowdown in the US economy, the Fed would like to cut short term rates.
GOLD
Gold prices are signaling potential inflation.
This is the market the Fed watches. Recall the peak in gold prices coincided with the end of the rise in Fed Funds. At the same time, the current rally in bond prices began.
Notice prices have not made new lows since the low of $560 in 2006.
With potential inflation looming, the Fed cannot cut short term rates.
MONEY
The Fed has been raising short term rates since the middle of 2002 and money growth slowed dramatically at first, from 20% to a low growth rate near zero in 2005.
Here's the problem: since the trough in growth rates in 2005, money began to grow again, and continues to grow at faster rates - 6% in the latest data.
This has to be troublesome for the Fed.
With money growth this strong, the Fed cannot cut short term rates.
TACTICS
Stay out of the stock and bond markets.
Stick with money market arbitrage. It's safe and profitable.
Lengthen liability maturities as rates allow.
Continue to shorten asset maturities. Place all new cash in Fed Funds and other short term instruments.
STRATEGY
Tell the board things are under control.
The spread continues to widen, making the bank more profitable.
The portfolio is nearly balanced, assets are over-weighted in the short end of the curve, and no hedging is required.
