Prague Twin

Wednesday, July 19, 2006

Bernanke

Bernanke sparked the stock market with his dovish comments on inflation concerns. The market believes that the Fed will pause at their next meeting, and if not, at the one after.

This was a much needed bounce for Wall Street. However, the picture is less than rosey. Bernanke cited slower growth as a check on inflation. This is the hint that they will not raise rates to combat inflation.

He was harassed
by a Senator...

”At the current rate, the Fed will overshoot and not even know it,”warned Kentucky Senator and former major league baseball pitcher Jim Bunning. ”The Fed is moving into dangerous territory.”

He also said that the Fed had been "fighting an inflation monster that doesn't exist." Mr. Bunning, may I refer you to the higher than expected core CPI data released just two hours before you made those comments?Good old boy Bunning out there putting a word in for the team. Have a look at the data before you say something really stupid. Oh well, it's too late.

If the Fed pauses at the next meeting, I'm goint to be surprised. Especiallly if we keep getting the kind of data we are getting. Benanke is in a bit of a hard spot though. Raising interest rates in slowing economy will not make him popular.

However, core producer and consumer inflation numbers will likely dictate policy and will force the Fed's hand. Therefore, I expect them to hike rates again in August. Bernanke's comments reversed the strong dollar trend that we have been seeing over the last week since the war in Lebanon started. Suddenly, with a few choice words, it is all turning around now. I had said that the EUR/USD may correct to $1.25, and it bottomed out at $1.2454 (I didn't know there was a war about to break out!). I imagine the dollar bears will be out in full effect tomorrow, trying to push back the recent dollar gains. Believing, foolishly, that the Fed will pause.

On tap for tomorrow is initial jobless claims. It has been running pretty high at around 330k. A very high number will be Wall Street positive because it will tell the market that the Fed will have to pause to try to stimulate the economy. Much lower housing starts than expected today also. This is the canary in the coal mine if you ask me.

Seriously, Benanke is caught in a really bad place right now. We are facing the prospects of slowing growth and inflation at the same time. This nasty combination is almost sure to lead to a recession. Right now, we are still quite far from it.

5 Comments:

  • Bunning's senile and stupid to boot. During his reelection campaign, his opponent exposed him as such. he won reelection because it's Kentucky, but he really is an idiot who should be put out to pasture.

    By Blogger reality-based educator, at 6:01 AM  

  • I figured as much. I wonder if he even knows what a chart looks like.

    Why do they let old guys like this even question Bernanke? Can anyone harass the Fed chairman?f

    By Blogger Praguetwin, at 7:50 AM  

  • Personally, I have never forgiven Bunning for throwing that perfect game against the Mets.

    By Anonymous Tony Sokolow, at 7:00 PM  

  • Good one, tony. Bunning was a helluva pitcher. Pretty shitty senator though. Just like Lynn Swann was a great wide receiver but looks like a terrible candidate for Pennsylvania governor.

    By Blogger reality-based educator, at 7:14 PM  

  • How about Jessie "The Body" Ventura? I'd say his athletic prowess is equal to his political capabilities.

    I don't even remember Bunning. Was this before my time?

    By Blogger Praguetwin, at 9:03 PM  

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