Filed under: Indices, Money and Finance Today, Economic data, Headline news, Housing, Federal Reserve
In Federal Reserve Chairman Ben Bernanke’s testimony before Congress today, he indicated that the most recent economic data show a “resilient” economy outside of housing. However, he also mentioned that growth should slow “noticeably” as the housing crisis intensifies. The recent rise in oil prices and its potential impact on inflation was also discussed.
Recent economic numbers, including the stronger-than-expected initial unemployment claims numbers this morning and productivity statistics yesterday, recommend that the economy is slowing but not deteriorating rapidly outside of housing. This indicates that there’s no pressing need on an economic basis for a cut in the Federal Funds Rate at the December FOMC meeting. Other Fed officials have also emphasized this in current testimony.
This need for a respite in interest rate cuts is particularly important with rising oil prices. Even though core inflation, the Fed’s preferred benchmark, is currently under control, there are still concerns with inflation that the Fed must address and manage to maintain credibility.
However, there’s still substantial volatility in the financial markets, as we saw yesterday with the substantial decline in the equity markets. The Fed has other means to address these problems besides rate cuts and has been injecting substantial funds into the market to alleviate the situation.
Chairman Bernanke is trying to leave his options open to cut rates quickly if necessary to deal with this situation. He also does not want to trigger a decline in the equity markets by appearing too hawkish.
He’s trying to walk a fine line managing market expectations while leaving his options open. We’ll have to wait to see how successful his efforts are.
Doug Roberts is the Founder and Chief Investment Strategist for FollowtheFed.com, an independent research firm focusing on investment strategies using the Federal Reserve’s impact on the stock prices. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
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