Bernanke spoke, and the farmer laid down his plow to listen, the banker pocketed his coin to mind, and the trader pushed up the market to make money. All the while, the coin of the realm continued its downward move.
Ben Bernanke’s first-ever press conference did little to change the dynamic moving the market. It did, however, give us all a clearer picture of U.S. economic health and the path the Fed will take for the next quarter or so. Specifically, he stated that QE2 would end in June as planned, and that interest received from the current balance sheet would flow back into treasury bonds and mortgage-backed securities to soften the exit from QE2. His comments also tacitly acknowledged the U.S. Treasury policy of manipulating the U.S. dollar to the weak side and he noted the Fed would not raise rates anytime soon to affect this policy. At the end of the day, the weak-volume market pushed higher, which suggests (lightly) the market has baked into its summer cake the end of QE2, as well as the continuing reality of a weak U.S. dollar.
So can “the Bernank” (as some in the analyst community refer to him) stay on the path he outlined? He seemed so confident and certain, but consider this – we are the only major economic power left that has not raised interest rates. This, of course, makes the U.S. dollar unattractive, which makes it weaker than other currencies. In this is the conundrum Bernanke faces. A weak dollar helps support the U.S. economy through rising exports and multi-national corporate profits, but non-core inflation is rising now to the point it is making a difference in the consumer’s life, that same guy we depend on to spend money on things other than gas and food.
To raise or not to raise, that is the question. Whether tis nobler to suffer the slings and arrows of outrageous inflation or to take up rates against a sea of rising exports and multi-national profits …
This will be interesting to watch as we move closer to summer. Fundamentally, though, if oil prices keep climbing, he may not have any choice. He does have one thing waiting in the wing that could help him with his conundrum.
There is a five-person board over at the Commodities and Futures Trading Commission (CFTC) whose job it is (has been since January) to implement the new Dodd-Frank regulations on excessive speculation in futures and commodities. This board is comprised of three appointed Democrats and two appointed Republicans. The rules that will go into effect (but have not so far) will limit the contract/position size any one trader can have in the commodities futures market. Currently, under the old rules, traders can effectively corner the market by controlling large percentages of the contracts. The board, however, has not implemented the regulations because one of the Democrats on the board is siding with the Republicans to hold off the regulations. This bit of treachery will soon end, coincidentally, in June when the appointment of the rogue Democrat runs out. President Obama will appoint another Democrat and the rules will go into effect. How long will it be before excessive speculation in oil is curbed? We will see, but the faster the better, as far as the Bernank is concerned, I am sure …
Trade in the day – Invest in your life …
