It has not been a very good couple of weeks for new Fed Chairman Ben Bernanke, he has not yet learned the skills that Alan Greenspan was most famous for. Greenspan speak was so convoluted and ambiguous that very rarely could anyone make out what he really meant. Over the last month Bernanke has made several gaffes that have resulted in the markets being roiled.
The equity markets had jumped in early May when Bernanke testified before congress. At that congressional appearance April 27th, Bernanke gave the impression that the Fed would pause in its 22 month campaign of raising interest rates. The result was that the Dow hit a 6 year high within two days of his testimony. Shortly thereafter CNBC reported this quote from Bernanke about the markets reaction to his congressional comments,'It's worrisome that people would look at me as dovish and not necessarily an aggressive inflation-fighter," the news wire quoted.
With the specter of continued rate hikes now back in focus the equity markets reacted sharply and negatively. With the possibility of a Fed induced recession in the future and the potential of declining corporate profits as a result, investors fled the major indices. The Dow had been at 11,700 and now 4 weeks later is 10,891. Friday's close marked the end of the worst performing week for the Dow in over a year. Nice going Ben!
Interestingly enough during this same period gold prices have dropped from year to date highs of $727 to a close of $612 dollars yesterday. More importantly than gold is the reaction of the bond market. While Bernanke seems to be wringing his hands over inflation and whether or not he is perceived as an inflation hawk, the bond market is screaming at him to wake up.
For the second time this week, the treasury yield curve closed with the short term yield inverted against longer term yields. The 2 year closed yesterday at 5% while the five year was 4.93% and the ten year was 4.97%. Buyers of the thirty year bond hardly seemed phased by the specter of inflation as it also rallied and closed at 5.02%.
A clear statement from Bernanke and the Fed is appropriate here regarding their intention to pause in rate hikes. There has been no clear and compelling economic data that would suggest that inflation is a real and impending threat to the U.S. and world economies. There is however clear indications that the Federal Reserve is a threat. Artificially high Fed induced rates and a corresponding inversion of the treasury yield curve has been a precursor to the last 5 major U.S. recessions.
There is some disagreement over the importance of this bell weather since the curve has inverted several times over the past 8 or 9 months, however given the fact that the Fed has hiked rates 16 consecutive times what exactly is the hurry? Will the economy be ravaged by inflation if the Fed takes a wait and see attitude over the next several months?
The winners in such a cautious policy are likely to be the average American who is already feeling the weight of higher energy prices. Average Joe and Joanne don't need added pressure from more increases in variable rate debt as well as the fear of government induced recession added to their burden.
