Dion Money Management Blog   Money Management for Retirees and Their Families

The small weekly gain from the S&P 500 Index through yesterday came as 10-year Treasury yields rose to 4 percent, continuing their steady march higher since the end of May. Mortgage rates followed Treasuries higher, such that interest rates for borrowers have risen from just over 4.5 percent to more than 5.5 percent. If 10-year yields increase at the same pace they rallied over the past three weeks and reach 4.25 percent, 30-year mortgages are likely to hit 6 percent, achieving pre-crash levels last seen in the summer of 2008.
Higher interest rates, along with higher oil prices, represent a potential drag on the economy as it tries to recover from the mountain of debt hanging over consumers. Retail sales increased 0.5 percent in May, but most of the increase was due to higher gasoline prices. Excluding gasoline, sales were up just 0.2 percent—within the margin of error.
The S&P 500 Index has been flat since rates started to rise in earnest at the end of May. Further signs of economic stabilization can fuel higher prices, but the risk of higher rates will limit the market on the upside until government finds a way to cut the deficit—without raising taxes—the way millions of common sense American consumers have lowered their debt, by cutting their costs and increasing their savings.
In other economic news, jobless claims dipped, foreclosures declined, and inventories continue to draw down. Although the S&P 500 Index has not gained much ground since the end of May, this rally has appeared to stall many times before continuing.
This week Bank of America (BAC) was the target of a Congressional inquiry into its purchase of Merrill Lynch last year, but collateral damage could spread much further than anticipated. In April, as part of an investigation into the bonuses paid at Merrill Lynch, New York Attorney General Andrew Cuomo discovered that Bank of America CEO Ken Lewis was pressured by Treasury Secretary Paulson and Federal Reserve Chairman Bernanke to go through with the Merrill Lynch takeover, even though Lewis believed it was in the best interest of shareholders to invoke the material adverse change clause.
Lewis’ testimony is an appetizer to the main course brewing in Congress, as Republican Rep. Ron Paul’s effort to have the GAO audit the Federal Reserve is nearing fruition. After stalling with mostly Republican support, Democrat Rep. Alan Grayson, a critic of the Federal Reserve’s transparency, made a push to garner support from his side of the aisle.
The risk here is what happens once Congress opens up the Federal Reserve to serious political scrutiny. Independence is vital to central banks, and it’s unclear what happens once this train gets moving. At the very least, I expect there are a few politically unpopular transactions on the books waiting to be uncovered in the process. Consider the outrage over bonuses that amounted to less than 1 percent of total bailout money, and then consider that the Federal Reserve has loaned out several times more than the Treasury. The risk that the Federal Reserve is unable to act with the same freedom it currently enjoys is real. Whether you believe that is good or bad, it will affect the way monetary and fiscal policies are shaped in the future.