Here's a theory.
Some out there think the Fed may cut rates fairly soon. I don't think so. Not that I am having an original thought but if the Fed cuts too soon it undermines their credibility and would likely cause some amount of panic selling in the dollar. Not to say that the dollar would not recover in this scenario but this absolutely something the Fed wants and needs to avoid.
Ron Insana started to go down this road yesterday saying something about an average of nine months between when hikes end and cuts begin. While I will take his word for that number I think a cut this year, save for a terror attack or other systemic shock, is off the table.
There has not been enough time for all of the rate hikes to work in to the economy. They had something in mind with regard to inflation as they were hiking and so some sort of scary number in the next couple of months should not be a shock if it comes.
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8 comments:
Unless the Fed. doesn't really mind a weak(er) dollar.
I don't see why every one is so convinced the Fed will cut so soon. Inflation figures are still elevated, why would they risk stoking the inflation fire with cuts? Seems completely counter to their M.O. of the last 2 years.
It is etched in granite. The mission is to fight inflation. Growth is secondary. Everything else is nothing more than shoe banging and perma bull posturing. Roger, is absolutely correct..IMHO.
I like your theory... frankly, I'd put another hike at > 50/50 for the simple reason that absolutely nobody thinks a hike could be remotely possible.
When you really think about it, what Bernanke is doing raises a tough question:
If you stopped hiking while inflationary numbers were still rising (because inflation lags), when do you start cutting again?
Put another way, the Fed is fading the faders?
Now I'm confused.
Between the impact of lower (much lower) commodity prices,excellent overall economic and employment numbers, war fatigue resulting in no future military fronts (as projected by recent military acquisition estimates), a more confident consumer, no more New Orleans-style fiascos and perhaps most importanly, mid-term elections, the Fed is probably not going to do anything to upset the apple cart with rate changes one way or the other until early 2007, if then. All bets are off if we take another hit on U.S. soil by Islamic Terrorists.
Anonymous puts it well: "It is etched in granite. The mission is to fight inflation. Growth is secondary."
Unfortunately realpolitik dictates otherwise. As I've said elsewhere the Fed, by pausing, sacrificed the US dollar on the altar of housing.
And, given the upcoming election, could we have expected anything less? Remember Bernanke spent over six months on Rove's lap, in the White House, just prior to his appointment.
Another factor that needs to be considered is the freshman Fed Chairman. Even in a constellation of circumstances where Greenspan could possibly ease, Bernanke cannot. It will take a few years for him to gain the heavyweight status and the unquestioned credibility. Until then he will have to err on the side of caution.
Read this:
http://www.paulvaneeden.com/displayArticle.php?articleId=170
Then this:
Erratum
September 18, 2006
In paragraph six of the last Commentary, the US dollar should fall by about 35% for the gold price to rise from $600 an ounce to $900 an ounce, not 50%. I apologize to the error and it serves me right for writing the letter so late at night. 35% is also at the low end of the OECD's range of how much the US dollar has to devalue to balance the US trade deficit.
All the best,
Paul van Eeden
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