Filed under: Other issues, Market matters, Getting started, Economic data, Headline news, Federal Reserve, Recession
Recently we’ve heard hawkish comments from Fed chairman Ben Bernanke. He has stated that interest rates will probably not be lowered any further and that inflation is now a major concern for the Federal Reserve.
The market has absorbed these comments with the dollar strengthening, and the stock market rising. Some are now even forecasting that the Fed will start raising interest rates as early as the end of this year.
What should investors take from these comments? What has happened to Gentle Ben, that individual who seemed to be the advocate of a loose monetary policy in order to cushion the economic downturn?
In my book Follow the Fed to Investment Success, I’ve stated, “Watch what the Fed does, not what it says.” Despite the hawkish comments from the Fed chairman, he has given no indication that he intends to raise interest rates in the near future. On the contrary, he made it very clear that this isn’t his intention. As today’s employment report and the recent housing data indicates, there’s still tremendous negative pressure on the economy which prevents any near-term tightening.
Then, why the hawkish comments? Despite the negative outlook, the recent economic data has not been as bad as expected. It appears that a recession will be avoided this year. The fiscal stimulus from the rebates is starting to be felt. There is very tiny the Fed can do to prevent inflation, but the comments do help to put a lid on inflationary expectations. This is what the Fed truly fears. These comments are an affordable way to combat core inflation with little cost.
However, with the overhang of continued declines in home prices and the credit crisis, I don’t anticipate the Fed to adopt a tight monetary policy anytime soon. Yes, Virginia, Gentle Ben is still here. He’s just giving some tough love to the financial markets this day.
Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, an independent research firm focusing on investment strategies using the Federal Reserve’s impact on the stock prices, and is the author of Follow the Fed (R) to Investment Success: the Effortless Strategy for Beating Wall Street. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
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