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Monday, June 19, 2006


Edward Hugh

"Governor Bernanke will want to cement his anti-inflation credentials early on, which must add to the upside risk."

I couldn't agree more. They should have seen all this coming and paused back in November or December. This whole transition has been very badly handled. Perfect foresight, bah!

Incidentally, I have just mailed you on this and other matters.


"Blame" is a difficult word to use, but interest rates sure look like pretty important. For example I just read this artcle:


on a popular form of mortgage in the USA, the ARM:

«ARMs, which featured a low introductory interest rate that resets upward after a set period of time, were easier to qualify for than traditional fixed-rate loans.
ARMs are now starting to fall by the wayside as the difference in interest rates narrows. The average rate on a 30-year fixed rate loan in May was 6.60 percent, compared with 5.63 percent on a one-year ARM, according to Freddie Mac. In 2003, rates on a 30-year fixed were at 6.54 percent, while ARMs carried a 3.76 percent rate.

Uhhh, 3.76% introductory rate that nearly doubles after a few years. Indeed:

«Speculative markets were overbought and risk aversion at multi-year lows. Something was bound to trigger a correction. In this case it was Bernanke's comments, coupled with a tigtening bias among most of the world's major central banks. But let's not blame the messenger.»

But he is a very powerful messenger, and widely perceived as someone who has got something to prove (hawkishness).

A bit unfortunate that he has to deliver the proof and take away the punch bowl just after a real estate boom/bubble financed by things like ARMs (or interest-only mortages).

Arthur Eckart

Obviously, the Fed has done an excellent job smoothing-out the business cycle (see June 2006 issue of PDF link below and see long run Real Gross Domestic Product). The Fed is not in the business of controlling individual markets, although many think so. The Fed controls the general economy through the general price level. When the Fed targets inflation, economic growth fluctuates little. When the Fed targets economic growth, inflation fluctuates a lot, eventually leading to instabilities in both prices and growth. In a short while, Bernanke has done an excellent job keeping inflation expectations low and slowing the economy to a more sustainable rate. Currently, it seems, a 5% Fed Funds Rate is neutral. However, a restrictive stance may be needed to preempt inflation.


David Wiczer

It is tough to fault Bernanke considering the questions he gets . I did not see his June 5th comments, but in Chicago he was asked whether we should be concerned about the current account deficit, the federal budget and even Cubs vs. Sox. He knows he has to keep up the Fed's reputation to deliver the harsh truths. But with these questions, the harsh truth is not so certain, and so he risks seeming to couch the bad news when he is really getting at the complexity of the issue. Though Cubs/Sox is an easy one


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