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Some Fed Officials Are Seeing Clearly
Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: March 5th, 2008 at 11:31 am EST
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Memo from the Fed: ‘We Get It Now’
It’s tough to admit you make mistakes, especially when you have a big ego. The complacency by the Fed last year and the Government as a whole in their tar-footed response to the subprime mortgage and housing mess is typical of Washington action. But the public was duped into believing Bernanke and Co. were above all that. While their academic credentials are stellar, the real world is where the public passes out grades…and let it be known this Fed barely has a passing one. However, a change in tone by Bernanke on Tuesday and some other Fed Governors seems to show they understand the crisis even better (it’s about time!), and further believe there is not much they can do with monetary policy to lessen the pain.
Bernanke sips the Kool Aid
The Fed chief spoke on Tuesday about housing and foreclosures. It wasn’t pretty, either. More foreclosures are going to force massive writeoffs from the banks. There is the potential for more credit problems, as banks will have a difficult time raising capital in a very tight market. The economy will suffer longer term effects from this whole crisis, according to Bernanke. He’s not wrong, of course….just a bit late in acknowledging the situation (at least a year!). All the sudden, Uncle Ben? He’s certainly no alarmist, preferring to let the ‘other guy’ shock the markets to the downside. Afterall, he’s a superhero and rockstar, coming to the rescue of markets at the right time on several occasions (see: Bernanke Put). Fed credibility is based on the notion of stable prices and controlled inflation. I think Bernanke has come around to the belief that there is a limit to the benefit of rate cuts, and while he may jawbone further and squawk about ‘taking out insurance’, this cycle of rate cuts is nearly over, or the effectiveness of such is nearly finished. He clearly ‘got religion’ and is telling the right story, even if it’s a painful one.
Fed Governors on Rate Cuts - Not So Fast
While the issue of supporting the economy is clearly the most important to Bernanke, there is a swell of doubters out there who believe rate cut effectiveness is dwindling. Oh sure, there is a brief spark when the news hits….but where are markets since the the first cut? Far lower. But let’s face it, rate cuts are to benefit banks directly…no direct benefit to consumers. How is this so? Have we seen banks lower credit card rates? Not at all. Mortgage rates? A dip below 5.5% stimulated some demand but that has quickly evaporated as rates are north of 6%, a level they were at when the Fed started cutting in Sept 2007. Cheap money for banks helps increase their margins if consumers and businesses pony up to pay their high rate bills. Recently, some Fed Governors have become ‘uncomfortable’ with rising inflation. Oil and gold at alltime highs, other commodities and food prices also rising, this is a critical time for the Fed. A recent speech from a Fed Governor noted they would TAKE BACK rate cuts fast if the inflation data did not improve. Rate cuts may spur higher inflation, they say. That’s right everyone…RATE HIKES. How else do you control rampant inflation? This will have a damaging psychological effect on the markets for sure. As always, let’s watch the data for clues and future commentary to get a read on direction.
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Bob Lang, Economics, Investing, Politics
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