If you are confused about the recent action in the markets, I suggest you look no further than to the monetary actions implemented by our Federal Reserve Chairman Ben Bernanke over the past eight months.
A couple of days ago, Helicopter Ben finally woke up to the fact that the Fed’s seven interest-rate cuts since last September have caused the value of the U.S. dollar to plummet and for inflation rates to rise. In a speech that he gave to students at Harvard University on Wednesday, Bernanke said, “Some indicators of longer-term inflation expectations have risen in recent months, which are a significant concern for the Federal Reserve.”
The prior day, Bernanke told a group at the International Monetary Conference in Spain, “The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation.”
In direct contrast, Mr. Bernanke said in his semi-annual testimony to Congress last November that a decline in the value of the dollar wouldn’t affect American citizens if they spend money only on domestic goods.
The Fed’s somewhat hawkish comments in the past six weeks regarding inflationary pressures had led some market participants to believe that the Fed would soon begin raising short-term interest rates. As a result of those presumptions, the value of the dollar had rallied since late-April.
However, the greenback resumed its descent against other world currencies this past Thursday, after European Central Bank President Jean-Claude Trichet (ECB) said that the ECB may raise its overnight lending rate next month to combat inflation. Although oil prices had fallen somewhat during the past two weeks, crude oil futures for July delivery spiked to an all-time high following Trichet’s comments.
Stock prices then fell sharply on Friday, after the U.S. Department of Commerce reported that non-farm payrolls fell by 49,000 during May and that the unemployment rate rose to the highest level since October 2004. The negative employment report led traders to forego their expectations of Fed rate hikes this year, which in turn added to the drop in the dollar and the rise in oil prices.
So, what is poor Ben Bernanke going to do now? Should he resume lowering short-term interest rates in an effort to stimulate the U.S. economy, or should he raise rates to combat inflation?
My suggestion is for Uncle Ben to go back to Princeton, where he won’t be confronted by real-world problems. Just maybe, the next U.S. President MIGHT be smart enough to appoint someone like Dallas Federal Reserve President Richard Fisher. Fisher, who is a member of the Federal Open Market Committee (FOMC), dissented in his opinion for the Fed to cut interest rates by another 25 basis points.
In the FOMC’s minutes to its April 29/30 meeting on monetary policy, Fisher said that he “was concerned that an adverse feedback loop was developing by which lowering the funds rate had been pushing down the exchange value of the dollar, contributing to higher commodity and import prices, cutting real spending by businesses and households, and therefore ultimately impairing economic activity.” (I made similar comments in an article that I wrote on April 25 titled “Fed Action Could Hurt Stocks, Economy”.)
By the way, Ben Bernanke has spent his entire career in the public sector. Before becoming a member of the Federal Reserve Board, Bernanke was a Professor of Economics and Public Affairs at Princeton University since 1985. Prior to that, Bernanke served as the Director of the Monetary Economics Program of the National Bureau of Economic Research (NBER).
Mr. Fisher, on the other hand, has considerable experience in the real world. Prior to becoming the president of the Federal Reserve Bank of Dallas on April 4, 2005, Fisher was the vice chairman of Kissinger McLarty Associates, a strategic advisory firm chaired by former Secretary of State Henry Kissinger.
Fisher began his career in 1975 at the private bank of Brown Brothers Harriman & Co., where he specialized in fixed income and foreign exchange markets. In 1987, Fisher created Fisher Capital Management and a separate funds management firm, Fisher Ewing Partners. Fisher Ewing’s sole fund, Value Partners, earned a compound rate of return of 24 percent per annum during his period as managing partner.
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