Rate Update - Bernanke Shows His Cards
A: While I'm still getting back to my normal schedule after a week in California, I did my best to stay on top of things since my last post on what the Fed is keeping an eye on as they decide whether 1 or 2 more 1/4 point interest rate hikes are ahead of us. Among the most important developments I see are that Oil is still high, the Economy is still showing strength, Gold prices continue to rise, and that fed chief Bernanke made a bold and telling move in a public appearance to Congress.
Lets get right into it.
Energy Prices Remain High As Light Sweet Crude Stays Above $70/Barrel
The price of oil remains at high levels above the $70/Barrel mark which will keep Bernanke & Co. on inflation alert. According to today's CNN Money article:
Oil rose above $74 a barrel on Tuesday, pushed higher by persistent fears about supply disruption, especially from Iran, and aggressive fund-buying across the commodities sector. U.S. light, sweet crude rose 47 cents to $74.17 a barrel, while London Brent crude gained 41 cents to $74.30.Not much we can do about this other than control our consumption of oil as today's energy crisis is the result of decades of bad policy by both governing parties and the incredible growth of demand by Americans. It still appears to me that it will get worse before it gets better. I will write another post this week on what Congress can do to help; and what it might do that could be a huge mistake!
US Economy Still Strong
Another CNN Money article titled, "A Hot Time in the Old economy" describes our situation well. Although energy prices and interest rates have risen over the past few years, the GDP #'s posted its fastest pace of gains in almost two years. Some key points of the article stated:
A number of economists say much of the first-quarter strength can be explained away by saying the economy was playing catch-up from weak fourth-quarter growth of 1.7 percent annual growth following the hurricanes, coupled with a boost from the warmest January on record. But with a number of March economic numbers such as home sales and durable goods orders showing much better-than-expected strength heading into the second quarter, it's not as easy for economists - or Fed policymakers - to discount a big first-quarter gain.
Gold Prices Continue To Soar
The price of Gold continues to rise as investors and speculators pour money into this historical safe haven. It's very common for the price of precious metals to be in demand in times of political and economical uncertainty; such as today. Add in a weaker dollar from the fed recent remarks and it looks like Gold will soon be at $700 an ounce. According to the Dow Jones Newswires:
Spot gold gained $9.50 on its New York close Friday to mark its latest quarter-century high of $661.60 a troy ounce as markets continued to digest the implications of Iran's defiance of a U.N. Security Council deadline Friday on ceasing its uranium enrichment program. Another driver of gold's accelerated uptrend is U.S. dollar weakness given the metal's status as a dollar hedge, participants said.
Bernanke Sets The Tone
Laymakers prefer a vigilant and tough fed chief when it comes to inflation and the negative effects rising prices have on a nation-wide economy. Former Fed Chief Alan Greenspan had a history of being that kind of leader as he was known for 'overshooting' on interest rate policy when it came to inflationary pressures; which means he would lead the fed board of governors to raise interest rates high enough to be certain inflation remains in check. By implementing this restrictive measure, there were times that his moves eventually hurt the US Economy by slowing its growth too much.
A few days ago we saw the first big move made by new fed chief Ben Bernanke as he addressed Congress. Bernanke states:
"We're much more data-driven," Bernanke said of the Fed. "We need to continually re-evaluate our forecasts and think about the prospects for the economy and make our decisions based on what the information is that's coming into our hands...There's always the possibility that, if there's sufficient uncertainty that we may choose to pause simply to gain more information, to learn better what the true risks are and how the economy's actually evolving," Bernanke told lawmakers.
We have to get used to the fact that Greenspan's style of addressing Congress and his actions to back up his words are GONE! According to a recent CNN Money Article:
The Fed chairman also said that he planned to stay on the path of his predecessor Alan Greenspan regarding increased openness at the central bank. During the past few years, the Fed, under Greenspan, was far easier to read and did a good job of telegraphing its interest rate moves to Wall Street. "We will continue Greenspan's movements toward greater transparency to reduce uncertainty in the financial markets," Bernanke said. "We have no desire of changing the basic operating procedure for the Fed."We are about to get the first real glimpse of new fed chief Ben Bernanke's cards which will give us very useful insight into how the monetary policy king will handle difficult situations in the future. Will he be unpredictable and data dependent? Or, will he be hard-lined and 'overshoot' like Greenspan had a history of doing?
It's becoming clear that Bernanke may choose to pause AFTER 1 more 1/4 point rate hike as he sits back and watch's whether all previous interest rate hikes do their job 6-8 months down the road.
Bottom Line: We need to see whether Bernanke gets tough and continues to raise rates UNTIL the inflation red flags go away or NOT! Should Bernanke pause after 1 more 1/4 point rate hike with inflation pressures as they are today, well then that tells you something about his style; uncertainty. Personally, I expect 2 more 1/4 point rate hikes ahead of us to help combat inlfation pressures.
