I’ve been talking a lot recently about how the Ben Bernanke Fed is facing policy challenges from abroad. Central banks the world over have been raising interest rates for months, in both the emerging and developed world. But Bernanke has continued to drag his feet, pledging to keep the easy money flowing.
Now, though, it looks like he could be battling dissention from within his own ranks too! In just the past few days …
* Philadelphia Fed President Charles Plosser warned that “monetary policy will have to reverse course in the not-too-distant future and begin to remove the massive amount of accommodation it has supplied to the economy.” He added that “failure to do so in a timely manner could have serious consequences for inflation and economic stability.”
* St. Louis Fed President James Bullard said “the economy is looking pretty good” and that the Fed should “see if we want to decide to finish the program or to stop a little bit short.” The program in question is QE2, the $600 billion money-printing boondoggle that’s helping drive inflation higher.
Bullard added that “it may be reasonable to send a signal to markets that we’re going to start withdrawing our stimulus, and I’d start by pulling up a little bit short on the QE2 program … We can’t be as accommodative as we are today for too long, we’ll create a lot of inflation if we do that.”
* Dallas Fed President Richard Fisher went even further, telling a European audience that “We’ve done enough” and “we’re at risk of doing too much.” Fisher even went so far as to say the Fed’s dual mandate of controlling inflation and boosting employment should be changed. He wants the Fed to have NO responsibility for employment, and to focus solely on inflation.
With Fedspeak Volume Rising,
It’s High Time to Pay Attention!
There’s no sign … yet … that Helicopter Ben is on board with the tightening trend. Nor are some of his fellow “doves” signaling any intention to end QE2 or raise interest rates from the current range of 0 percent to 0.25 percent. But the hawks are definitely turning up the heat here, and it’s high time that we investors pay attention.
Why? Because easy money is a key driver for many of the market moves we’ve seen lately!
But don’t just take my word for it. Ask yourself:
- Why does crude oil keep going up and up on the same news?
- Why do stocks surge right back after every correction?
- Why do junk bond prices keep rising inexorably higher?
- Why are stupid loans starting to rear their ugly head again?
- And why is the dollar falling virtually nonstop?
Because the Fed is always at the ready with billions and billions of freshly printed dollars, that’s why! It’s a monetary policy-driven bout of asset inflation, just like we’ve seen multiple times over the past two decades.
So it stands to reason that IF anything interrupts the flow of easy money — whether it’s the end of QE, a rise in rates, or both — the asset markets are going to get whacked. That’s why the ever-changing tone in Fed remarks is so important to note.
What to Watch for Next
I’d pay very close attention to the results of the April 26-27 Federal Open Market Committee meeting. Not only will this be the first meeting after these more hawkish remarks, but it will also be the first time the Fed holds a post-meeting press conference.
Yes, you read that right …
Rather than hide behind prepackaged statements, Ben Bernanke will stand in front of the microphone and explain the Fed’s actions. He’s going to do that several times a year going forward — with this year’s briefings scheduled for April 27, June 22, and November 2.
If Bernanke shows any shift toward the hawkish side of the ledger, we’re going to see some real market fireworks. The trend toward a flatter yield curve will likely accelerate, while the stock market could take a tumble.
So get ready … because it may soon be time to make some portfolio adjustments!
Until next time,
Mike
{ 16 comments }
ink + paper does not equal wealth. how stupid we are to keep accepting the phony money.
Ink+paper isn’t wealth but ink+paper+.gov stamp is. You don’t believe that, but billions of others do. Thats how fiats work. Simple.
I believe it is an effort to make the USA more productive by inverting a tradtional trade relationship between the USA and emerging nations, traditionally exporters. The dollar at its lowest level in a decade (relative to Brazil´s Real, where I live) makes US goods cheaper in the world. If the USA can export more this makes its economy more productive.
And, yes, the Central Bank of Brazil is planning yet another increase in its Selic interest rate, already one of the highest if not the highest in the world.
Being overseas, my strategy is to buy more american dollars now, while they are “cheap” and try to hedge positions in both countries even if it is the oldest hedge in the world strategy, “under the mattress”.
I am interested in learning more strategies in currency hedging for my type of situation.
the US will become more productive by driving wages to 0
Buy some PM too – they can be best hedge against everything ;).
There may be a law of physics about to kick in soon. “For every action, there is an equal and opposite reaction”, which is what Bernanke and Obama have known all along. Hold rates ridiculously low for as long as possible, which ultimately leads to the inverse outcome eventually, which will be an incredibly level of inflation. There are only two possible explanations for this strategy; 1) we intend to pay the dividends and capital back from our borrowing frenzy with hightly devalued dollars. 2) Cause chaos to secure an altogether different outcome for the US, and the dollar as the “reserve currency”.
Neither scenario ends well … if you are not in inverse etf’s, get out of the market now!
mc
That is what happens when you give International Bankers unaudited control of a any Nations wealth.
The situation was exacerbated when the Gold Standard was ended by Nixon in 71.
This is going to get real interesting.This article from Walmart CEO telling you,if you still don’t see inflation,that you soon will.I believe the Fed will raise rates,but they won’t raise them as high as inflation.There is no way this country could stand the kind of treatment Volker administered to stop inflation and gold bull,in the early 1980′s.We were still the leading economic power then and debt was no where near what it is today.When the Fed starts raising rates and talking tough there will be a significant correction in real assets but won’t last long.
http://www.usatoday.com/money/industries/retail/2011-03-30-wal-mart-ceo-expects-inflation_N.htm
Any interest rate rise will increase our interest payment on the national debt tremendously. It is currently around $250B and could easily top $500B with a 1/2 pt. raise. What do you think that will do to the budget deficit?
Precious nothing – as long as a dollar is just an electron transferring from one energy state to another.
If you want to be taken seriously you’ve got to be more thoughtful. For example, you state that some blame the rise in oil prices on the fighting in Libya. You argue that other oil producing countries are equally vulnerable. You probably don’t need a lesson in economics, but PRICES ARE SET BY SUPPLY AND DEMAND, something you don’t consider in your rant. Has the Libyan conflict caused a decline in world supplies of oil? Is the price rise simply a function of a decline in the US dollar? Talk to us about things that are relevant, not just grab onto a single piece of data as a segue into your rant about expansion of the money supply. I hope your readers are not so naive!
Tp a large extent prices are set by speculation in futures markets using so call hot money courtesy of the FED. According to Marx there is no necessary relationship between idustrial and finance capital, the latter of which is still on the ascendancy despite the so called GFC
Time to go FLAT?
Whatever is happening, it is a dangerous game being played. The indiscriminate printing of money under the guise of QE, and the devaluation of the US Dollar as a consequence, may be calling into question the very nature of “money” itself (Cf. Jim Grant’s commentary yesterday on CNBC). While QE2 is declared to end this June, one can only hope that there will be no QE3 to add more to the blunders being committed, but that the feds would smartly begin to tighten money supply by raising interest rate gradually and then significantly, commensurate with the gaining strength of the economy. Is it time to siphon away the excess liquidity injected? Can it even be done? Can this ship be turned around? How much inertia is there before things do get turned around? First question, is there the will to keep the US Dollar from crashing any further, while silver rises to astronomical levels and predictions of Silver at $100 and Gold at $7700 per oz are being bandied about amongst speculators in the precious metals market?
Perhaps St. Louis Fed Chairman James Bullard thinks the economy looks good because he sees the economy as being the stock market prices and the world of bankers, brokers, analysts, economists and most of all his own job security. The economy is a lot more than propped up markets and manipulated assets. If the economy is looking good, one must ask, relative to what. Ask the 42 million unemployed about their economy or the businesses about to lay off even more. Bullard is right about the need to cut QE2 short. $600 billion shorter would have been a good number. Not because the economy is better, but because QE2 primarily delays the timing of recovery.
Those of us who were children of the last depression could not afford toys so our favorite game was “kick the can”. I don’t recall seeing Ben Benanke at our games, nor did I ever dream that the game was a lesson in how to be a Fed Chairman. However, perhaps we need to thank Mr. Bernanke for a bit of nostalgia by taking us back to the 1930′s with all of the same hype and empty promises of prosperity “just around the corner”. The problem then and today is how far is it to that mythical “corner”.
mike stops short of rendering his opinion on what’s critically important to many of us who follow him.
i.e., specifically what’s his opinion on how gold and silver stocks will perform when the markets
goes down when the federal money pumping is reduced or stopped.