The Fed Blew It

07/10/2008 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Bernie Schaeffer, editor of the Option Advisor, says Ben Bernanke and the Federal Reserve continue to have terrible timing, and he doesn’t expect rate increases this year.

[At its last meeting,] the Federal Reserve was confronted with the twin dangers of a potential inflationary spiral and a banking/credit/housing-led economic implosion and chose to deal with neither. By so doing (or by so not doing):

1. They left the market with the continuing message that their next interest-rate move will be a rate hike, despite absolutely no evidence of any improvement on the banking, credit, or housing fronts. Those who were concerned about the economy sinking into a credit- induced black hole walked away with nothing to alleviate their worries.

2. At the same time, the timing of any rate hikes was expressed in such ambiguous terms that any potential inflation-fighting message was almost completely muted, thus allowing for a surge in commodities prices to record levels.

3. The message of #1 and #2 served to devastate the stock market on all fronts, with even the commodities-based stocks taking hits due to overriding concerns about the fragile economy.

While I don’t wish to understate the challenges to this economy, I think the Fed’s biggest problem over the past year has been the man who seems to continually rate a great big “pass” from the financial media—Ben Bernanke.

He was way too slow to begin cutting rates in the wake of last summer’s crisis, in large part because of pressures from his economist peers and from the financial media to establish his so-called “credibility” as an “anti-Greenspan” kind of a tough guy.

I’m sure this was what compelled him to make his very poorly conceived hawkish statements earlier this month about inflation, only to be forced through his minions to recant them when interest rates surged.

It’s been fair game for some time now by the experts quoted in the financial media to characterize the Fed as generally too loose and too permissive. In fact, it would not be much of a stretch at all to conclude that over the past 20 years the Fed has had not a clue as to the right thing to do on rates, and that it has aggravated both the credit cycle and the economic cycle.

So, where do we go from here?

I continue to believe that the tough “Fedspeak” about potential rate hikes is pure blather, and that we will not see a rate increase in 2008 [because of] a combination of credit and housing remaining in near-crisis mode and the upcoming Presidential election. This will provide an ongoing fertile environment for commodities and commodities-based stocks, and there is still more money to be made from sectors such as energy, energy service, coal, agricultural commodities, and steel and iron.

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