Two weeks ago, on June 9, Fed Chairman Ben Bernanke indicated that the Fed would get tough on inflation, in a speech we discussed in this previous blog post, which also contains a link to the full speech by the Fed Chairman.
Since then, doubts have arisen as to whether the Fed is serious about actually pulling the trigger, based on dovish statements by other Fed officials, including Vice Chairman Donald Kohn.
The week of Mr. Bernanke's hawkish statements, the markets had a positive week, ending at 12,307 on the Dow and 1360 on the S&P. Gold fell to $873 by that week's end. Since then, however, the Dow fell back to 11,842 this past Friday June 20, the S&P fell to 1317, and gold moved back to close the week at $903.
This week, the FOMC meets Tuesday and Wednesday, announcing their target rate decision on Wednesday, and no one expects them to actually hike this week, although the tone of the Fed statement will be very important to see if there are indications of increased hawkishness against rising inflation pressures.
As we have stated in numerous previous posts, we do not advise investors to buy and sell securities based on whether they think the Fed will raise or lower rates this meeting versus next meeting, or any other short-term barometer. We believe in a foundation of ownership of well-run, growing businesses through many economic and market cycles.
However, we have also argued previously that the building inflationary pressure, including the severe run-up in the price of oil, is yet another consequence of easy Fed policy dating back to 2003 which had a hand in exacerbating the housing problem as well as excessive CDO underwriting.
Therefore, we would like to see the Fed remove the excess stimulus it provided earlier this year and get back to focusing on providing a stable currency, which is of paramount importance to businesses and to investors in securities -- both stocks and bonds.
While the conventional wisdom is that the markets hate Fed rate hikes, we believe that some tough and aggressive inflation fighting would actually be good for the market. And, even though the Fed probably won't do it this week, those hikes may come sooner than expected for those who still think it's a good idea to bet on continuing increases in the prices of gold, oil, and other commodities. This may be a good juncture for them to ask themselves the famous line from Dirty Harry: "Do you feel lucky?"
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For future posts dealing with this same subject, see also:
- "Still in thrall to the Phillips curve?" 03/15/2010.
- "Inflation is a monetary phenomenon" 03/07/2011.
Dream on. You've hear the story about the scorpion and the frog.
ReplyDeleteBernarke is the scorpion in the story, are you trying to play the part of the frog here? This is helicopter Ben we are talking about here.