Yesterday, Fed Chairman Ben Bernanke gave a speech at the Federal Reserve Bank of Boston's 52nd Annual Economic Conference in Chatham, Massachusetts. In his speech, he said, "The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation."
The equity market dropped this morning as a result. Many traders interpreted these comments quite hawkishly, assuming that the Chairman was implying that interest rates may be raised as early as the end of this year. But as I have stated previously in my book, Follow the Fed to Investment Success, "Watch what the Fed does, not what it says."
This speech reminds me of the famous "irrational exuberance" speech by then Chairman Alan Greenspan in late 1996. Greenspan said that "irrational exuberance" had caused the equity markets to reach unsustainably high levels. Many then interpreted these comments quite hawkishly and assumed that the Fed would be raising rates shortly.
However, the Fed did not raise rates until several years later. Economic events, such as the debt crisis in the emerging markets and Russia, prevented the Fed from taking action, and the U.S. equity markets continued to rise. The bear market in the S&P 500 finally did occur in 2000, almost five years later.
I believe that the Fed is in a similar situation today. Although it may not lower rates, economic pressures, this time in the United States, not overseas, will prevent the Fed from raising rates until this is resolved. Although Bernanke said, "the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so," he also stated, "the ongoing contraction in the housing market and continuing increases in energy prices suggest that growth risks remain to the downside."
In addition, Fed chairman usually do not like to be seen as influencing elections. Therefore, any interest rate increases will not come until next year at the earliest after the new president has taken office.
Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices, and is the author of Follow the Fed ® to Investment Success: the Effortless Strategy for Beating Wall Street (www.FollowtheFedtheBook.com ). He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
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Reader Comments (Page 1 of 1)
6-10-2008 @ 4:31PM
william lindblad said...
If current trends continue the Fed will begin raising rates in the 4th quarter. For now - the status quo.
6-10-2008 @ 5:09PM
clem591 said...
why is a private bank named the federal reserve,
it makes me think sham and fraud on the american public
why is a sixties silver quarter still holding its value
why hasn't the treasery notes lost their purchasing power
why is a federal reserve note losing its value
:"Gold still represents the ultimate form of payment in the world".
more Alan Greenspan quotes
7-08-2008 @ 4:24PM
scott levy said...
how does bernanke feel about giving the seniors interest money to big business and to banks,isn't that the same stealing from us? please answer that mr bernanke.