PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
After weeks of talking past each other, Ben Bernanke and the markets finally managed to click—if only for a day. On June 29, when the Federal Reserve raised interest rates by a quarter-point for the 17th time in a row, to 5.25%, the Dow shot up 217 points and bond markets picked up (see BusinessWeek.com, 6/29/06, “Stocks Rally After Fed Hikes Rates”).
The rate hike was widely expected, but investors were applauding the Fed statement that accompanied the move. Despite tough inflation-fighting speeches over the last month by Bernanke and other Fed members, the central bank's written comment emphasized that economic growth is “moderating” and the public's inflation expectations “remain contained.”
Though still on guard against rising prices, the Fed says it will base its rate decision at the next August meeting on incoming data on both inflation and economic growth. A slowing economy would likely mean inflation will ease. “This leaves the door open for [the Fed] to stop” or pause, says Kevin H. Giddis, head of fixed-income trading at Morgan Keegan, a Memphis brokerage firm. Of course, a pause may be temporary, since the Fed could resume raising rates if inflation pressures start building again.
IN A LATHER. Still, investors breathed a sigh of relief. After Bernanke gave a June 5 speech calling recent upticks in inflation “unwelcome&rdquo,; followed by similar talk from Fed Vice-Chairman Donald Kohn and regional Fed bank Presidents Jack Guynn and Jeffrey Lacker, the markets started girding for the worst. A minority of investors even predicted the possibility of a 50-basis-point increase at the June meeting. And futures markets were pricing a 90% probability of a rate increase at the next August meeting.
“The investment community was building up a lather,” says Jim Paulsen, chief investment strategist at Wellington Capital Management.
Now those fears are dissipating. Talk of a 50-basis-point move—never a high possibility—have all but evaporated. And the futures market is back at pricing in a more customary 50-50 probability that the Fed will raise rates at its next meeting.
So have Bernanke and the markets finally gotten in sync? Maybe. Bernanke started out his tenure signaling that slowing economic growth might pave the way for a temporary pause in the Fed's continuous rate hikes since June, 2004. But then the Fed and investors were surprised by three months of unexpectedly high increases in inflation. To tamp down the public's expectations of future inflation, the Fed has continued to hike rates and take a tough stance against rising prices.
WATCH AND WAIT. But now, after all that display of resolve, the public's inflation expectations have drifted down. And Fed watchers bet that over the next two months, data shedding light on economic growth will be more important to the Fed than inflation figures. The Fed's August move will depend on such data as employment numbers and second-quarter GDP estimates out in the next month, says Paul Ashworth, U.S. economist for London-based Capital Economics. And Bernanke may drop more clues at upcoming testimony in Congress on July 19 and 20 on the Fed's semi-annual Monetary Policy Report.
If moderating growth is in store, maybe the Fed chief will be able to start putting behind him his first rough patch and look forward to some easing of his own—into a comfortable tenure at his new job.
Yang is a correspondent in BusinessWeek's Washington bureau
Printer-Friendly Version