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.

Brinker's 60-day Moving Average Put/Call Ratio Indicator Remains Bullish

One of Bob Brinker's sentiment indicator components is what he calls the "60-day put/call ratio." 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.

The current reading for the 60-day put/call ratio is 1.00.

• In January 2000, when Brinker last lowered his asset allocation to equities , the 60-day put/call ratio was 0.525
  
• In March 2000, when the S&P500 peaked before the 2000-2002 bear market, the 60-day put/call ratio was all the way down to 0.475.
  
• In November 2002, shortly after the markets bottomed in October 2002, the 60-day put/call ratio was 0.86
  
• In March 2003, when Brinker returned to a fully invested position, the 60-day put/call ratio was 0.82

This chart shows the sixty day moving average of the equity put/call ratio.

Click chart to see full sized version courtesy of stockcharts.com

In his January Marketimer, Bob Brinker reported:

"The 60-day put/call ratio remains in bullish territory as the new year begins."

Brinker remains bullish, does not expect a bear market (as defined as a 20% or more decline in the S&P500) and he looks for new highs to be made in the year ahead.

Read:

• Monday, December 24, 2007:
  Bob Brinker's Mid 1400's Buying Opportunity

If you want to read what Brinker said in his full update of this Marketimer stock market timing indicators, then you have to subscribe to Marketimer.

You can also read Bob Norton's free "estimate" of what Bob Brinker's timing model would do in "Bob Brinker Shadow Stock Market Timing Model Update." Brinker doesn't say if his individual indicators are bullish or bearish, but it seems Bob Norton made a direct hit with his estimate Brinker would remain bullish and fully invested.