Speaking late last week in Washington Federal Reserve Board Chairman Ben Bernanke hinted that rate hikes may be on the way. Bernanke said, “When the economic outlook has improved sufficiently, we will be prepared to tighten the stance of monetary policy and eventually return our balance sheet to a more normal configuration.”
Not exactly a bold statement but a necessary one as it became imperative to say something supportive of the dollar after last week’s weakness. It has not lasted as the dollar made a new low for the move today.
What is so bothersome about Bernanke’ comment is it ignores what he has been saying all year. We noted here recently the Chairman’s rhetoric doesn’t match his actions. First he has been talking about improving conditions for months then he says “when the economic outlook has improved sufficiently.” What is sufficiently and why hasn’t the tightening begun?
All this most recent comment means is that at least someone at the Fed has an eye on the dollar and suggested to Ben maybe he ought to say something.
The Aussies raised rates last week from its recession bottom of 3%. Yes the Australian economy and banking sector wasn’t as sick as ours and is also quicker to recover but note that the bottom was 3%, a level that is now too accommodative.
The Fed has maintained after recent meetings that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
Understood. But we are at zero. Bernanke has said we are probably out of the recession and things are improving. A zero rate policy is extraordinary; anything below 3% is accommodative.
If you wait until things are growing, and growing briskly as opposed -- I guess -- to the type of improvements the Chairman has been seeing lately, how do you put the brakes on? How do you go from zero to not accommodative—most recently judged to be somewhere between 4.75%-5.5% based on the last tightening cycle and historically much higher. A zero percent Fed Funds rate is not accommodative, it reflects emergency conditions.
Basically what the Fed has been saying all year is that while the economy is still weak, the emergency is over. So why not act like it is.