In Federal Reserve Chairman Ben Bernanke's testimony before Congress today, he indicated that the most recent economic data show a "resilient" economy outside of housing. However, he also mentioned that growth should slow "noticeably" as the housing crisis intensifies. The recent rise in oil prices and its potential impact on inflation was also discussed.
Recent economic numbers, including the stronger-than-expected initial unemployment claims numbers this morning and productivity statistics yesterday, suggest that the economy is slowing but not deteriorating rapidly outside of housing. This indicates that there is no pressing need on an economic basis for a cut in the Federal Funds Rate at the December FOMC meeting. Other Fed officials have also emphasized this in recent testimony.
This need for a respite in interest rate cuts is particularly important with rising oil prices. Although core inflation, the Fed's preferred benchmark, is currently under control, there are still concerns with inflation that the Fed must address and manage to maintain credibility.
However, there is still substantial volatility in the financial markets, as we saw yesterday with the substantial decline in the equity markets. The Fed has other means to address these problems besides rate cuts and has been injecting substantial funds into the market to alleviate the situation.
Chairman Bernanke is trying to leave his options open to cut rates quickly if necessary to deal with this situation. He also does not want to trigger a decline in the equity markets by appearing too hawkish.
He is trying to walk a fine line managing market expectations while leaving his options open. We will have to wait to see how successful his efforts are.
Doug Roberts is the Founder and Chief Investment Strategist for FollowtheFed.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
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Reader Comments (Page 1 of 1)
11-08-2007 @ 5:05PM
william lindblad said...
The biggest problem confronting the economy is the Fed itself. Greenspan built public confidence into it. When there are economic woes, the Fed comes to the rescue, or so everyone is led to believe. In fact, this is probably the 2nd most powerful job in the world. At present, they are leaving their "options open", while at the same time observing that the last rate cut is not having it's desired effect. It was intended to instill confidence and stabilize markets.
The dollar slide continues and this in turn will impact other world economies that are presently strong. China, our largest purchaser of government debt is talking of going elsewhere. The full extent of the housing write downs are still in the future and this is a very uncertain picture. The damage figures range from the billions to the trillions which confirms that much is unknown.
I don't envy Bernanke and would not wish to be in his shoes.
Worse, the exact sources of all of this financing is also in the unknown category.
If there is a modern day version of the S.S. Central America out there - we have a big problem.
11-08-2007 @ 6:26PM
dave said...
why should the fed bail out an oversold market? They should, not if stocks cannot hold up under pressure ,then they are dogs anyway.