Bernanke's doing a lotta talking, but when will he take action?
Hot off the presses: Fed chairman Ben Bernanke says the central bank will raise rates when the economy recovers.
Revelation? Not quite. Across The Curve blogger John Jansen said it best: “I wonder who would have been so obtuse as to think otherwise?”
Key issue, of course, is timing – when will the Fed decide a rate-hike is warranted? We’re not any closer to figuring that out (and probably neither is the Fed.)
For now, however, the mere mention of increasing rates at some distant point is enough to give the US dollar a much needed boost.
Still, don’t expect the Fed to boost rates until after unemployment peaks, despite recent Fedspeak from Bernanke and other policy makers, Calculated Risk predicts. In the early 1990s, the Fed waited more than a year and a half after the jobless rate peaked before raising rates. And after unemployment peaked in 2003, the Fed waited a year to boost rates.
Unemployment’s expected to keep rising into 2010, which has Calculated Risk believing the Fed won’t raise rates until late 2010 at the earliest, and more likely sometime in 2011. Waiting for the economy to “improve sufficiently,” as Bernanke puts it, likely means the Fed will wait for a meaningful decline in unemployment, blog adds.
Meanwhile, an emerging rift among policymakers over when to tighten money is developing, as NYT’s details in a story today.
Fed officials have hinted at new disagreement in recent weeks. The arguments go beyond the traditional split between hawks, who worry that easy money will stoke inflation, and doves, who contend that unemployment is the top problem.
The more devilish debates are about how fast to act once the decision has been made, and how to carry it out. Beyond raising the overnight federal funds rate, the Fed also has to unwind $2 trillion in special programs that prop up paralyzed banks and credit markets.
Policymakers haggling over when to take action isn’t new. In fact, it may just be a stalling tactic that allows them to buy more time before making a decision – a common theme during times of crisis, according to Mike “Mish” Shedlock, an investment adviser for SitkaPacific Capital Management.
That mentality makes him wonder if recent statements by Bernanke and other Fed members “are nothing more than an attempt to appease both the hawks and the doves simultaneously via conflicting and/or ambiguous signals, hoping to buy time,” Shedlock says.
“Bernanke in particular, and central banks in general are clearly juggling a lot of balls,” he adds. “In light of global and domestic crosscurrents, it is questionable how much longer this high-wire juggling act can last.”
