Bernanke's credibility on the ropes
As
the spectre of economic meltdown has media, Wall Street and George Bush
crying for a solution in unison, Ben Bernanke's counterpoint message
that the economy is just growing slowly and not yet headed into a
recession seems surreal. Wall Street's market crash seem to be a ploy
to force Bernanke and the Fed to drastic rate cuts... and Bernanke is
starting to look like the problem - "all talk and no action".
Bernanke and the FOMC, knowing that each time they meet over the first half of 2008 will likely require one more rate cut, seems to be setting a target low Fed Funds rate (such as Goldman Sachs year end 2008 rate target of 2.5%), and then backing into a "schedule" for an orderly rate drop. Economist View has a good reference article on this rate cut control strategy by Fed watcher Tim Duy, who believes that the Fed will continue to act conservatively with a 50bp rate cut on January 31, and not the 75bp the masses are clamoring for, so they have room for further future cuts if necessary.
However, this strategy won't help with Bernanke's fragile credibility with the public because it will likely cause the stock markets to suffer even further as Wall Street continues to force the rate cut issue by selling off. The "just do it" mantra started by Jim Cramer, then followed by Donald Trump, will start to get more credible voices joining in.
Although Bernanke and the Fed speculate they may be able to raise rates again once the economy has righted itself, it probably won't happen for a while because it will likely take a few years for the correction (and just try raising rates when the economy is correcting, it will effectively plunge it back down again). That means we may be looking at a low interest rate period starting this spring/summer that could last several years.
Here's a long, but insightful article on Bernanke: Education of Ben Bernanke - - New York Times Magazine, January 13
Bernanke and the FOMC, knowing that each time they meet over the first half of 2008 will likely require one more rate cut, seems to be setting a target low Fed Funds rate (such as Goldman Sachs year end 2008 rate target of 2.5%), and then backing into a "schedule" for an orderly rate drop. Economist View has a good reference article on this rate cut control strategy by Fed watcher Tim Duy, who believes that the Fed will continue to act conservatively with a 50bp rate cut on January 31, and not the 75bp the masses are clamoring for, so they have room for further future cuts if necessary.
However, this strategy won't help with Bernanke's fragile credibility with the public because it will likely cause the stock markets to suffer even further as Wall Street continues to force the rate cut issue by selling off. The "just do it" mantra started by Jim Cramer, then followed by Donald Trump, will start to get more credible voices joining in.
Although Bernanke and the Fed speculate they may be able to raise rates again once the economy has righted itself, it probably won't happen for a while because it will likely take a few years for the correction (and just try raising rates when the economy is correcting, it will effectively plunge it back down again). That means we may be looking at a low interest rate period starting this spring/summer that could last several years.
Here's a long, but insightful article on Bernanke: Education of Ben Bernanke - - New York Times Magazine, January 13
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