Everyone Likes Ben Bernanke Today
By Pejman Yousefzadeh Posted in Ben Bernanke | Economy | federal reserve | Interest rates — Comments (3) / Email this page » / Leave a comment »
With the economy facing the possibility of a recession, people are consistently looking to the Federal Reserve to lower interest rates. Today, the Fed Chairman indicated quite clearly that he and the Fed are prepared to do just that:
Stocks rose in volatile trading Thursday after Federal Reserve Chairman Ben Bernanke soothed investors by stating that the central bank is ready to lower interest rates to shore up the economy.
The Dow Jones industrial average initially jumped more than 130 points on Bernanke's comments but bobbled up and down, perhaps because investors realize that it will take more than rate cuts to restore the economy's upward momentum. Still, Bernanke's comments appeared to reassure a market that has stumbled since the start of the year amid growing evidence that the economy is weakening.
The Fed chief said the central bank is prepared to act aggressively to rescue a weakening economy.
"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," he said.
Jim Herrick, manager of equity trading at Baird & Co., said, "We're seeing this pop here, but I think it's temporary."
He added that many investors have been betting for some time that the Fed will lower rates by a half-point at their next meeting. "There's still subprime issues. We still have concerns about earnings, and the mortgage market."
Eventually, of course, the Fed will have to confront and counter the threat of inflation, especially in the food and energy sectors, which are even more volatile than usual. But for now, giving the economy a jump start is a major issue and the Fed is right to contemplate a hefty rate cut.
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Everyone Likes Ben Bernanke Today 3 Comments (0 topical, 3 editorial, 0 hidden) Post a comment »
The current spikes in food and energy prices are not monetary phenomena. They're demand-driven. If the Fed were to sharply increase short-term rates (which I think is what you're advocating with your mention of Volcker, although I really don't understand what you're saying), it would have to raise them enough to strongly suppress economic activity. That would dampen prices for refined energy products here, but would do nothing about food prices.
The Fed Funds target rate is currently 4.25%.After January 29, it will likely be 3.75%. The stock markets will be buoyed by this expectation until the rate cut happens. Then, unless the outlook changes, they'll probably sell off again. After 9/11, the funds rate went as low as 1%. There's a distinct possibility we'll go back there.
Keeping the economy afloat with low rates: I honestly think the goal is to keep Wall Street afloat. Many sectors of the economy are doing darned well these days.
Monetary inflation (the kind that happens when interest rates are too low) will only be a concern when you see employers raising wages, and passing the increased costs along as higher prices. That never happened during the low interest-rate era that stretched from 2000 to 2003.
SIV transparency: that appears to be a problem well on its way to resolution. (By definition, if you move SIV assets onto your balance sheet, as many large SIV-sponsors have now done, that makes them transparent.)
The Arabs are going to fund the losses with their petrodollars. Ironic, huh?
The Fed's between a rock and a hard place with the economy at the moment.
Clearly, the risks are that growth will continue to decelerate as a result of the credit crunch. But the risks to inflation becoming embedded into the system through food and energy are very real, yet the bond market doesn't seem to be discounting this liklihood.
To compound matters, the weak dollar is getting to a point where it will impact our domestic economy by increasing the cost of ALL goods, not only imported ones, because of the increased purchasing power of the holders of Euros, Yen, and Sterlng to "bid away" resources from our country.
Yet, the only real tool Bernanke & Co. have to keep the economy afloat is the Fed Funds Rate, and I think ole Propellerhead acknowledged today that it may have to go A LOT lower.
Personally, I'd like to see the FOMC float the FFR like Volcker did in the early 80's to stamp out inflation. It would likely go in reverse, with the rate dropping dramatically rather than exploding like it did in the Volcker Fed.
Whatever the FOMC does, they need to act swiftly to restore confidence to the markets, and they need to get the banks to come clean with transparency into the CDO's and SIV's they hold on their balance sheets.