>In this week's _The Nation_, Jamie Galbraith says:
>
><quote>
>By all accounts, the Fed is poised to raise interest rates, in a wholly
>symbolic anti-inflation gesture. If the logic of this escapes you, don't
>worry, there isn't one. The move is just a concession to the Fed's
>internal lobby of right-wing economists and pleaders for the banks and
>bondholders, who always want higher interest rates and who like to invent
>inflation threats to justify them.
><endquote>
>
>It's not the first time I've heard this idea that bondholders are the
>force behind higher interest rates. But why is the bond market is always
>said to "rally" when interest rates go down, and said to take a hit when
>they go up? That makes it seem like bondholders would always want *lower*
>interest rates to increase their capital gains.
>
>Where am I going wrong? What is the easy solution to this seeming
>paradox?
The bond market does badly when the Fed is tightening. Sometimes bond types *say* that a tightening would be good for bond prices (which move in the opposite direction of interest rates) - they said that in 1994, and they're saying that now. But in fact bond prices fall (and long rates rise) when the Fed is tightening, and vice versa. But that short-term pain does consolidate their long-term position, by driving down inflation, and when a period of tightening comes to an end, and the Fed turns friendly again, bonds have a bull market.
In the current case, and in the 1994 case, the bond market is leading the Fed. Long rates troughed/bond prices peaked in October 1993, well before the Fed started tightening in Feb 1994. The same thing has happened recently, with long rates rising by a point or so, well ahead of the Fed's tightening of policy.
So, the bond market doesn't always want higher rates. Their favorite time is when the Fed is loosening after a recession, in fact.
Galbraith & other liberals lack a class struggle understanding of monetary policy. (Warning: this evaluation of monetary policy is based on a superficial understanding of Marx.) Inflation may be a nonexistent threat if you're looking at the CPI. But if you're defining the threat of inflation by what Greenspan calls a "diminishing pool of potential workers," then the threat isn't nonexistent. Witness the union strength stories that have circulated on this list in the last couple of days.
Doug