FOMC Chairman Ben Bernanke says 'Substantive' Rate Cuts May Come Soon

Bob Brinker has said the Federal Reserve Chairman Ben Bernanke has been making rookie mistakes to worry too much about inflation. In a speech yesterday FOMC Chairman Ben Bernanke strongly hinted the Fed would reduce its short-term interest-rate target, probably by half a percentage point from its current 4.25%, at the central bank's next meeting, Jan. 29-30. He said the Fed could act before then if needed but it would take a dramatic deterioration in the markets or exceptionally bad economic data.

From Bob Brinker Moneytalk Summary, January 5-6, 2008, Honeybee wrote:

Excerpts of Brinker's reply (to a caller): “I think we can identify what we certainly know would cause a recession. One thing would be if the Fed gets it wrong. If the Fed interprets, for example, high oil prices as a priority – now so, far they have not done this…………then they would make the mistake, which would be very disappointing, that they would think that they can actually control oil prices – which they cannot. They have no power whatsoever. Oil is a global commodity, and they have no power whatsoever at the Fed, or to even have a significant impact. If they make the mistake of thinking that they have to fight oil prices by raising rates, then that will cause a recession. All they have to do is go back into a pattern of raising interest rates –tightening monetary policy--that will definitely cause a recession. There is no question in my mind.
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So far they have gone the other way……..I expect them to cut rates again by the end of this month – at the January 30th meeting, at the latest……And I wouldn’t be surprised to see them cut rates again after that, because they are behind the curve. We have a ROOKIE at the controls at the Fed. I’ve talked about it for months, and you have ROOKIE risk. And ROOKIE risk tells you that the ROOKIE in control may not do everything the perfect way…….They were locked in their IVORY TOWER going into August. We were badgering them to death – I don’t think they care."

Bernanke said the Fed must "remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability."

The Wall Street Journal reported today:

• The speech comes at a crucial time for the Fed. Mr. Bernanke noted that until last spring the central bank thought it was facing "the classic problem of managing the midcycle slowdown" -- guiding the economy from rapid to slower growth in order to keep inflation in check. But the dramatic deterioration in housing and credit markets since then has significantly raised the risk of recession -- an outright contraction of economic activity and employment lasting at least six months.
  
• Inflation concerns figured in yesterday's decisions by the ECB and the Bank of England to leave their interest-rate targets at 4% and 5.5%, respectively.ECB President Jean-Claude Trichet suggested at a news conference following the ECB's meeting that the threat of higher inflation remains the central bank's top concern. Euro-zone consumer-price inflation in November and December was at a 6½-year high of 3.1%, well above the ECB's goal of just under 2%, and policy makers expect high food and energy prices to keep the rate elevated in coming months. Mr. Trichet warned the ECB "is monitoring wage negotiations...with particular attention."
  
• The Bank of England will release minutes of yesterday's meeting on Jan. 23. They are expected to show the bank kept rates steady because of inflation concerns -- including fresh utility-price increases and the pound's 7% fall against the dollar since November.

Asked about a possible recession, Mr. Bernanke said, "The Federal Reserve is not currently forecasting a recession. We are forecasting slow growth. But...it's very important for us to stand ready...to address those risks and provide some insurance against those negative outcomes."

What changed for Mr Bernanke?

The U.S. employment report for December showed a decline in private-sector jobs. Mr Bernanke said this was "disappointing," and added "[Previously,] relatively steady gains in wage and salary income [were] providing households the wherewithal to support moderate growth" in spending. "Should the labor market deteriorate, the risks to consumer spending would rise," he said.

The higher unemployment rate, 5% in December up from 4.7% in November, shows that one inflationary pressure, higher wages from tight labor markets, is declining.

To make the Fed's job harder, the labor department yesterday reported initial claims for unemployment benefits fell 15,000 to 322,000 last week, the second straight decline, suggesting the labor market isn't deteriorating dramatically.

When former FOMC Chairman Allan Greenspan kept increasing interest rates above 4% to reign in the housing bubble, Bob Brinker complained on his Moneytalk radio show by saying:

"What does Allan Greenspan have against people's home prices going up?"

Clearly the FOMC was right to be concerned and they probably should not have kept rates so low for so long and better monitored the loans member banks were making so they would not have a mess to clean up today.

10-day and 60-day Put Call Ratio at Record Highs!

In his September Marketimer, Bob Brinker wrote very highly of the "extraordinary" high levels for the 10-day and 60-day moving average of the CBOE put/call ratio.

Click graph to view full sized

The CBOE (Chicago Board Options Exchange) Put/Call Ratio (CPC) is the ratio of the trading volume of put options to call options. Bearish investors buy put options that gain in value when the market goes down. Bullish investors buy call options that gain in value when the market goes up. A high put/call ratio is bullish for us contrarian investors.

I track the 10-day and 66-day moving averages of the put call ratio. 66 days is three months. As the graph shows, the 66-day and 60-day moving averages are nearly identical and both are at record high levels. This is GREAT NEWS for us bulls!!!

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Bob Brinker Update for 3/14/06

Bob Brinker is bullish and remains fully invested in his equity portfolios. For new money, he recommends dollar cost averaging. My favorite Bob Brinker Reporter, David Korn, writes:

• * NEW MONEY TO INVEST February 18-19 Newsletter:
  
  Caller: This caller was gifted quite a few shares of a company stock and he wants to sell it and raise cash to invest into the market. How should he go about it? Bob first talked about how much gains have been in the market since his buy signal in March 2003, and then recommended that for new money such as the cash he raises from the sale of the gifted stock, Bob would adopt a dollar cost average approach and use something like a total stock market index fund or an S&P 500 fund to invest. You could also invest the money in an exchange traded fund like the VIPERs (ticker: VTI). Bob said he would dollar cost average "at a pace you are comfortable with" as long as Bob's outlook on the market remained favorable. For now, however, Bob said his market outlook remains favorable as it has since March 11, 2003.
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• OPENING MONOLOGUE - YIELD CURVE March 4-5, 2006 Newsletter:
  
• Brinker Comment: Bob opened the weekend broadcast by discussing the so-called "inverted yield curve." Bob said there is a lot of misinformation about the yield curve. The definition of the true yield curve is the difference between the 90-day Treasury Bill and the long-term Treasury Bond which is now the 30-year Treasury, currently maturing in February 2036 which has an annual coupon of 4.66%. It was auctioned for the first time in 5 years, and now it is out there trading. At present, the 91-day Treasury Bill is currently yielding 4.48%. We look at the difference between the 90-day and 30-yr. and can see an 18 basis point (0.18%) positive yield slope. Thus, we do NOT have an inverted yield curve and it isn't even totally flat. Bob said it gets him crazy when he reads all the stupid wrong information about the yield curve!
  
• David Korn Comment: You know it pains me to say this, but Bob is wrong. Yes, wrong. Ooh, it gives me chills just writing it. I know its hard to believe; after all, in 20 years, how many times has Bob said he was wrong?" [snip] Bob has chosen the 90-day versus the 30-year probably because of the seminal study that I have linked to in the past. However, there have been other serious published studies that compare the 90-day to the 10-year and other spreads. The question shouldn't be which is "right" but rather, which is the most accurate in terms of forecasting recessions. John Mauldin has written a great series on the yield curve. Read Part 8 if you want to see what I am referring to. You can find it here.

In our Bob Brinker Discussion Forum we've been talking about Bob Brinker's market timing model. He uses this in his "Marketimer Newsletter" for predicting the stock market in the months ahead. On recent shows, Bob has recommended I Bonds for purchase. I Bonds are currently paying 6.73% on new money as I explained in my article called I Bonds.

• [ More Information and links at "I Bonds Explained" ]

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