Mr. Market Missed Something In Bernanke's Speech

People have grasped onto Bernanke's last sentence in Thursday's speech. They seem to have missed what he said before and may wish they didn't.

It seems the only thing the market heard was the following sentence.

Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.

What they seemed to have missed was this little nugget in the prior paragraph:

Even as the outlook for real activity has weakened, there have been some important developments on the inflation front. Most notably, the same increase in oil prices that may be a negative influence on growth is also lifting overall consumer prices and probably putting some upward pressure on core inflation measures as well. Last year, food prices also increased exceptionally rapidly by recent standards, further boosting overall consumer price inflation. Thus far, inflation expectations appear to have remained reasonably well anchored, and pressures on resource utilization have diminished a bit. However, any tendency of inflation expectations to become unmoored or for the Fed’s inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank’s policy flexibility to counter shortfalls in growth in the future. Accordingly, in the months ahead we will be closely monitoring the inflation situation, particularly as regards to inflation expectations.

While an upcoming rate cut seems to be a forgone conclusion, it would seem Bernanke is trying to tell the market not to get too far ahead of itself down the road. Fed funds futures seem to be pricing a full percentage point cut or more in rates this year. What Bernanke is telling the market is that while it will get its cut this month and it will most likely be a 50 point one, inflation will determine the ability of future cuts to be made...

Comments

[granger:]

I agree. I am not sure exactly what people/markets are looking for. We have all ready been given a great gift. Interest rate cuts, that we did not deserve (inflation wise) from historically low levels. I really do not want anymore cuts.

I am a huge propent of Martin Zweig's work and I see a screaming buy signal. I would be even more opptimistic if the fed stopped here (at most one more). We all ready have a great rate environment, excess is being flused from the financial system, technology is transforing or productivity, a gloabl boom is in place, all we need is the fed to do a reasonable jobe of fighting inflation and this market will go throug the roof, just mmy opinion.

In disclosure, i had a negative (3%) last year, as i sat out almost all of last year and did not start accumulating to Novemeber/December. I have actuall faired ok this yaer only doen (1.1) and have been buying my wish list ggressively.

2008 Jan 13 11:40 AM

[kkin365:]

Thanks for adding the sentences prior to the last in Bernanke's speech. With this addition, I have to say that B is much more cautious than the street wants to make it. If there is a rate cut, in the face of the ECB's holding its rate steady, it means that the dollar would further weaken relative to the euro. Given that the OPEC wants to price oil using the euro as the currency, oil price has to go up. Perhaps this is not inflationary, since the core price index does not include oil nor food. Still, to an ordinary person on the street, it adds to the cost of earning a living. Bernanke is certainly in a tough position -- I personally think that the street's demand(?) is unbecoming. "You know nothing"???

2008 Jan 13 11:45 AM

[floridadon:]

I would like to see a study of the link to food price inflation and the corn to ethanol production. There is no free lunch.

2008 Jan 13 12:10 PM

[Dr. Duru:]

Good catch, Todd. But perhaps the market DID pick up on this during Friday's sell-off. This phrase is extremely important since it is the Fed's most direct and most specific admission that inflation looms as a potential threat.

2008 Jan 13 12:18 PM

[Michael Davey:]

The Fed is a political animal and this is an election year - combine that with the raging financial forest fires out there and you can deduce their hand is forced.

New Fed-candy is meant for the ill-balanced, weak and dying financials and a shot in the consumer's (ARMS) during an election year, but the candy is just added-dandy for already healthy growth.

I'm keying growth from within the leadership groups; long and longer. Growth stocks are launching!

2008 Jan 14 01:53 AM

[Heritageinv...:]

Good point! I think the "Greenspan Put" that the markets have come to rely on could actually be detrimental to our economy in the long run. The Fed cannot remove all risk from stock investing/ the economy - not do we want them to.

2008 Jan 14 10:19 AM