FOMC Pause, Riding Shotgun with Uncle Ben Bernanke
The long awaited “Uncle Ben” Fed Day finally happened yesterday. The FOMC (Federal Open Market Committee), or as Erin Burnett calls them- Federal Open Mouth Committee, kept short term interest rates at 5.25% along with a slightly dovish statement for the possibility of future rate hikes. I believe this was the best thing that could’ve happen for the market and trusted Uncle Ben Bernanke, being the smart guy that he is, to do see what I saw. This was what I hoped would happen, though I did not bet on the market as such. It was good I didn’t, as far as how yesterday’s session ended much lower after the FOMC release. Whether the market was confused by the dovish statement when it was expecting a hawkish statement, or whether everyone’s just afraid of a hard landing, I hope people come to their senses.
I first got the hint that he was heading for this pause and dovish statement at the senate testamony. There were a lot of concern regarding housing and high oil prices. Stick in the significant slowdown in GDP growth, I’m not sure there was any other action the FEd could have taken. What the worry of inflation comes down to is how much you can buy for the same amount of money. The main driver of inflation right now seems to be the high price of oil and how us oil-thirsty Americans would sacrifice spending on a lot of other stuff just to keep driving these huge SUV’s. While the FOMC’s broad hammer tool of the rate hike whacks just about everything, it doesn’t really whack oil prices. What it does whack is the housing market, hurts all the regular folks whose greatest investment and asset is probably their home. Oh yeah, and it is these regular folks who would be hurt most by inflation.
Some analysts were worried about the fairly higher wages in the second quarter, especially in relation to productivity. I don’t know if this was what Bernanke was thinking, but given the current conditions I thought higher wages was a good thing. If the main thing eating away at regular people’s ability to buy things is the price of oil and the price of oil isn’t coming down, you’re gonna have to line people’s pocket with more money. Companies are just racking up cash and it didn’t seem the wages being paid were keeping up with the recent high-powered economic growth, so in that sense there’s nothing to be concerned about either if companies give back to the employees who generated the cash.
Either way, I didn’t think the FOMC could’ve done much else than keep rates at 5.25% and suggest that they’ll keep it at such. We have to line the consumer’s pocket with more money by keeping the housing market alive and higher wages. However, if wages do get out of hand, one CNBC guest had a good suggestion. He said in the 70’s interest rates were raised while taxes were lowered. Yes, lowering taxes would line consumer’s pockets with more cash to drive the economy. Adding taxes to the mix would make it that much more complicated to evaluate the situation and I haven’t done so, so I won’t say any more on it other than it seems like a much more viable solution than the Fed rate hike hammer. The rate hike hammer, in the current state of the economy, would only kill the consumer and the economy and not the problem of higher energy and commodity prices.
P.S. Many have pointed out this is a much different economy now with the world being more integrated than ever before. With all the other countries recently raising rates (including Japan who haven’t done so in FOREVER), it might be more effective to have a global rate hike rather than any individual country. In that light, the Fed’s job might’ve been done for it and done in a more effective manner.
Wall Street Journal: Ben’s Fed May Not Be Done Yet
