MEET THE NEW BOSS, SAME AS THE OLD BOSS?

NEW FED CHAIRMAN BERNANKE TELLS CONGRESS THAT RATE HIKES WILL KEEP COMING

Fed Chairman “Almost for Life” Alan Greenspan stepped down in January, after almost 20 years at the helm of the Federal Reserve Board. Greenspan was replaced by Ben Bernanke, a well-regarded academic economist. Prior to Bernanke’s appointment, most Fed watchers expected that Bernanke would raise the Fed Funds rate by another .25 point at the next Fed meeting, bringing this important rate to 4.25%. Fed watchers expected this because Bernanke would need to follow Greenspan in unswerving attempts to find and destroy inflation in the US economy. Bernanke is apparently ready, willing and actively working to find and kill the last surviving dodo.

WE KNOW THERE IS INFLATION. WE KNOW WHERE IT IS HIDDEN

Despite the fact that the core inflation rate (excluding the volatile food and energy sectors), came in at about 2% last year and is expected to come in at about 1.75% to 2% next year.[i] Growth in the Gross Domestic Product (GDP) is coming in at a somewhat below-par range from 3% to 3.5%. Revisionist newsmen and government officials are the only ones really pleased with these weak numbers coming out under the Bush administration. The historical average for GDP growth is 3.5%, so where’s the risk of an overheated economy? No inflation, no overheating. So what is to slow? In fact, the economists and analysts the Author follows see a greater possibility of recession in late 2006 than a run of inflation.

What the Author thinks is really happening is a near-pathological fear that interest rates will spike and cause insecurity among foreign central banks regarding their full vaults of US Treasuries. Bernanke does not want his first year or two at the Fed to be the years where the US government-borrowing spree is clipped. Better a mild recession than a debt crisis. This may not be a bad approach.

IS BERNANKE SAYING “IT’S DIFFERENT THIS TIME”?

One interesting comment from Bernanke was his response to a question about the inverted-yield curve:

He also said in response to a question by committee chairman Michael Oxley, R-Ohio, that the so-called inverted yield curve isn't the sign of a recession or economic slowdown, as it has often indicated in the past.

An inverted curve occurs when longer-term rates are lower than those for short-term debt. Bernanke said rates at both ends of the curve are low by historic standards, and should not be a drag on economic growth.[ii]

Inverted-yield curves are traditional harbingers of recessions. Some analysts believe that this inverted-yield curve does not predict a recession for many reasons, one reason being, as stated by Bernanke, that long rates are historically low because there is virtually unfettered demand for 10-year US bonds by foreign central banks. But for the Federal Chairman to say this at his first meeting is quite an uncommon statement. Especially when a recession does appear likely late in 2006.

BUT THAT’S POLITICS

In other comments, Bernanke seems less inclined to discuss government fiscal policy such as budget deficits, tax cuts and domestic spending issues. Greenspan’s one blemish resulted from his comments appearing to favor the Bush tax cuts that have reinstated structural fiscal deficits.

Bernanke’s more circumscribed statement was:

I think that in my role as chairman of the Federal Reserve, it is appropriate to talk about long-term government spending, deficits and taxes," he said, adding later in his answer, "We need to be addressing those long-term solutions soon.[iii]

And knowledge is good and drugs are bad. And another 75 million for Bush’s program to establish democracy in Iran will be money well spent.[iv]

USE LOTS OF SUNSCREEN IN THE DESERT OF THE REAL!


[i]“Bernanke Sees More Hikes Coming”, February 15, 2006, CNN Money, http://money.cnn.com/2006/02/15/news/economy/fed_bernanke
/index.htm?cnn=yes
[ii] “Bernanke Sees More Hikes Coming”.
[iii] Bernanke Sees More Hikes Coming”.
[iv] “Bush wants Extra $75 Million for Program to Spur Democracy in Iraq”, http://news.yahoo.com/s/nm/20060215
/ts_nm/iran_usa_dc;_ylt=Aj35h6ZxygOa_Fy85pBT0bN34T0D
;_ylu=X3oDMTA5aHJvMDdwBHNlYwN5bmNhdA--