Sign in
Become a MarketWatch member today
David Callaway
Dec. 16, 2009, 6:44 p.m. EST · Recommend (1) · Post:
View all David Callaway "º
"¹ Previous Column
Bankers can find new home -- in Frankfurt
First Take "º
FedEx brings out the humbugs
By David Callaway, MarketWatch
SAN FRANCISCO (MarketWatch) -- Ah, to be recognized as "person of the year" on the same day Tiger Woods was named "athlete of the decade."
There are almost no similarities between Federal Reserve Chairman Ben Bernanke, honored by Time Magazine Wednesday, and the out-of-bounds Woods, who was named as a top athlete by the Associated Press, except one. Both are going to have a lousy 2010.
For Woods, the reasons are obvious. For Bernanke, it's because after a year in which he received high honors for basically sitting on his hands, next year is when he and the Fed have to finally steer the economy out of this mess.
The Fed's decision to leave interest rates near zero, and unchanged Wednesday and for "an extended period," was the right one. Why kill the rally in equities, commodities, bonds and emerging markets with only two weeks left in the year? But judging by the market reaction -- muted -- it simply postponed what everybody knows is coming next year, a turnaround in interest rates.
Europe has long advocated for a stable economy; the U.S. has preferred a dynamic one. WSJ's David Wessel says those mindsets are clashing once again during the current crisis.
It's not that rates are going to shoot higher all of a sudden. With the Fed's benchmark overnight lending rate now in a range between zero and 0.25%, it would take seven quarter-point rate increases just to get to 2%.
The issue is that the markets understand that the turning point itself will signal a re-evaluation of global assets. Investors have grown used to the easy practice of selling the U.S. dollar and buying everything else. But gold, stocks, bonds and other commodities don't move in lockstep in normal markets. The move to raise rates will reshuffle the deck in ways many experts can only guess at.
Bernanke and the Fed really want to see a pickup in hiring and job creation before they tap the brakes on the economy with higher rates, which theoretically make borrowing more expensive and slow economic growth. They will get their wish. Many U.S. businesses have completely overshot on layoffs, especially in the financial sector, and will need to beef up quickly once business starts coming back next year.
Jobs are a lagging indicator, though, and by the time they get back to meaningful levels, i.e. national unemployment under 8% from its current 10%, the markets will already be at full boil on concern about inflation. That hurts bonds, as well as the portfolios of the big banks and big countries that hold them, but might provide a further boost for gold.
Stocks will be all over the place, and arguably the least affected by rising rates. But equity investors will still be nervous and trigger-happy at every debt warning, bank failure or emerging market surprise that comes in the next 12 months. A slow, steady increase in rates could even help stocks. It's just the uncertainty of not knowing when it might start that's holding them back right now.
Ideally, Bernanke should have been recognized as Time's person of the year in 2008 (instead of President Obama). That's when he actually helped save the global markets, along with Hank Paulson and Tim Geithner, by furiously pumping government funds into the banks and the financial system. He got derided at the time for agreeing to bail out the big banks and standing up to those who said it was a waste of taxpayer money. Now, as the banks line up to pay back the funds they borrowed plus interest, for a multibillion-dollar profit for Uncle Sam, those same people are claiming the Fed is leaving the scene too early. Go figure.
Bernanke got his honor late. Let's hope he's not late himself to throw the switch on the change in interest rate directions next year. The Fed needs to unwind this economic rescue as soon as it can. The longer it keeps easy money on the table, the longer this global market bubble has time to build.
Expect the Fed to act sooner rather than later.
David Callaway is editor-in-chief of MarketWatch.
- woodsmoke52 | 9:01 a.m. Today9:01 a.m. Dec. 17, 2009
What FedEx delivered this morning was the excuse wary investors were looking for to lock in recent gains. And many did.
55 min ago1:42 p.m. Dec. 17, 2009
Investing wisdom from the north
Exxon-XTO may bring energy independence
On Retirement
The best gifts for retirees
Editor's View
Man of the moment has rough year ahead
Tech Tales
Oracle not making many concessions over Sun
On Personal Finance
Tips for making the most of gift cards
On the Markets
No contrast between best/worst forecasts
Media Web
Read Full Article »