Tags: federal | reserve | policy

Frazier: Bernanke Throws a Hail Mary

Thursday, 26 June 2008 08:49 AM

The clock has run out and Harvard’s fans have stampeded onto the field with joy, as their team appears to have won the annual football game with Princeton!

But, wait! Princeton’s quarterback Benny Bernanke just threw a Hail Mary! If the team’s wide receiver catches the pass in the end zone, Princeton’s students will cheer with glee, as their team will instead win the tightly contested game!

In football terminology, that’s essentially what Federal Reserve Chairman Ben Bernanke did yesterday when the Fed decided to leave its overnight lending rate unchanged — the Fed threw a Hail Mary pass.

In other words, Bernanke and the other members of the Federal Open Market Committee (FOMC) — save for Dallas Federal Reserve President Richard Fisher — appear to be hoping that the ongoing economic slowdown will cause inflationary pressures to moderate during the months ahead.

One can only guess that this is what it means when the Fed said that it “expects inflation to moderate later this year.”

In the event that inflation rates do come down and economic conditions improve, Bernanke and his team of so-called “experts” will then be able to claim that they did the right thing by lowering the target Fed Funds rate seven times between September 2007 and April 2008.

On the other hand, if inflationary pressures continue to mount and the economy continues to grow at a sluggish rate, the Fed will still be in a position to claim that it made the right decision. Specifically, the Fed will be able to claim that it needed to significantly lower short-term interest rates and dramatically increase the money supply in an effort to stimulate economic growth.

In addition, the Fed will be able to claim that it had no control over rising inflation rates, because it will likely argue that any significant increases in industrial and consumer prices were due to rising commodity prices, rather than to the Fed’s monetary actions.

Although I expect Bernanke and his teammates to continue trying to persuade U.S. consumers that the Fed is doing everything that it can to “promote sustainable economic growth and price stability,” there’s little evidence to support quarterback Bernanke’s comments. For example, the Fed could have instead raised its overnight borrowing rate and reduced the money supply in an effort to increase the exchange value of the U.S. dollar and, in the process, to reduce oil and gas prices.

In the FOMC’s statement to the press yesterday, the Fed said that “although downside risks to growth remain, they appear to have diminished somewhat.” Yet, the Fed also said that “tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.”

The Fed also said that it “expects inflation to moderate later this year.” But, it went on to say that “the upside risks to inflation and inflation expectations have increased.”

The problem with those statements is that they contradict one another — does the Fed think that downside risks to growth have diminished or that tight credit conditions and the ongoing housing contraction will continue to “weigh on economic growth”? Does it think that inflation will moderate or that inflation risks have increased?

The answer is really quite simple — the Fed is merely trying to confuse the American public and to hedge its bets by carefully crafting its comments about economic growth and inflation.

In essence, the Fed said nothing yesterday that everyday consumers didn’t already know — that economic conditions have deteriorated significantly over the past several months, and that the prices of all types of goods and services have risen dramatically. Yet, quarterback Bernanke has decided to rely on a Hail Mary pass to save the day! Oh boy, what courageous leaders we have!

On the plus side, it’s becoming easier and easier to figure out the Fed’s next move, which in turn is enabling astute investors to more easily select the most profitable sectors of the markets to invest.

Click here to find out which sectors will lead the way in the second half of 2008.

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DavidFrazier
The clock has run out and Harvard’s fans have stampeded onto the field with joy, as their team appears to have won the annual football game with Princeton!But, wait! Princeton’s quarterback Benny Bernanke just threw a Hail Mary! If the team’s wide receiver catches the pass...
federal,reserve,policy
681
2008-49-26
Thursday, 26 June 2008 08:49 AM
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