Bernanke’s speech: Hawkish comments on ‘irrational exuberance’ for 2008
Posted by: in Money NewsFiled under: Forecasts, Bad news, Market matters, Money and Finance Today, Economic data, Presidential elections, Headline news, Federal Reserve, Recession
Yesterday, Fed Chairman Ben Bernanke gave a speech at the Federal Reserve Bank of Boston’s 52nd Annual Economic Conference in Chatham, Massachusetts. In his speech, he stated, “The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation.”
The equity market dropped this morning as a result. Many traders interpreted these comments quite hawkishly, assuming that the Chairman was implying that interest rates might be raised as early as the end of this year. But as I’ve said previously in my book, Follow the Fed to Investment Success, “Watch what the Fed does, not what it states.”
This speech reminds me of the famous “irrational exuberance” speech by then Chairman Alan Greenspan in late 1996. Greenspan stated that “irrational exuberance” had caused the equity markets to reach unsustainably high levels. Many then interpreted these comments quite hawkishly and assumed that the Fed would be raising rates shortly.
However, the Fed didn’t raise rates until several years later. Economic events, such as the debt crisis in the emerging markets and Russia, prevented the Fed from taking action, and the U.S. equity markets continued to rise. The bear market in the S&P 500 finally did occur in 2000, nearly five years later.
I believe that the Fed is in a similar situation today. Even though it might not lower rates, economic pressures, this time in the United States, not overseas, will prevent the Fed from raising rates until this is resolved. Even though Bernanke stated, “the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,” he also stated, “the ongoing contraction in the housing market and continuing increases in energy prices advocate that growth risks remain to the downside.”
In addition, Fed chairman usually don’t like to be seen as influencing elections. Therefore, any interest rate increases will not come until next year at the earliest after the new president has taken office.
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 (www.FollowtheFedtheBook.com ). He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
Entries (RSS)