Ben Bernanke's Mistake - Dissing Inflation

A: Ben Bernanke & Co. DISSED Inflation pressures today in favor of US economic growth concerns as the fed left rates UNCHANGED. A mistake showing that today's fed is not about fighting inflation, the stated #1 job of the federal reserve, rather is about bringing stability to capital markets and providing a psychological floor should a slowing US economy take place.

FED STATEMENT SHOWING CHANGE IN BIAS:

Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

FED ACKNOWLEDGMENT OF INFLATION PRESSURES:

Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

Well, my last post on a hike in interest rates to combat inflation fears goes out the window as the fed dismissed inflation fears by leaning towards a NEUTRAL bias with regard to future monetary moves. Its not that inflation pressures are easing, actually they are rising, but its that the fed basically removed any chance of a rise in interest rates in the near term to fight these fears. In fact, one can now argue that the fed is preparing the markets for a future rate CUT as they move their bias from TIGHTENING closer to NEUTRAL; a step closer to the midway point between a tightening and easing bias.

I don't like it. I think the fed folded to the markets and put themselves in a tougher position should inflation pressures not go away in the near term. Maybe the fed knows something the markets don't? Maybe they didn't want to mess around with a tightening bias in the face of subprime woes? Maybe they know that the US economy is slowing faster than everyone else thinks? I doubt that. Corporate earnings are still strong and the unemployment data soon to come will be a very interesting data point to analyze to see if the labor market is worsening. If so, that would validate today's move as a slowing economy should help ease inflation pressures and a rate cut will be the likely medicine to pump ummph back into the US financial system.

Hats off to Nouriel Roubini, long time bear and blogger of RGEMonitor, who called it exactly right and predicted in this video (17 min long) that the fed must acknowledge the slowdown in housing, the slowing US economy, and change the bias towards a neutral or rate cutting one. Exactly what they did! VIDEO REPORT

Learn as we go with this new fed chairman. One thing I do know is that inflation hawks HATED today's statement by the fed, including me, who fears that inflation can cause way more damage than a recession could!

The stock marked SURGED today as the fed abandoned the tightening bias and interpreted the move as the clear step towards a future rate cut; something equities like to see to stimulate future economic growth. Recall my last post on why lower rates might not be good though as if the fed does cut rates it is because the economy is slowing and jobs are being lost!

For Buyers - Don't expect lending rates to go up anytime soon! Expect them to stay put or trickle down a bit in the near future. No rush to lock in a rate.

For Sellers - It's a bit worrisome that the fed stated, "...the adjustment in the housing sector is ongoing", a clear acknowledgment that housing still has major hurdles against it down the road. While NYC remains strong and is isolated from the nation-wide slowdown, it's narrow minded to think there will not be any correction at all to Manhattan real estate. If you are thinking of selling, take advantage of the current strength in our marketplace and sell sooner rather than wait for the generally slow summer months.

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