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Howard Gold's No-Nonsense Investing
April 22, 2011, 12:01 a.m. EDT
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By Howard Gold
NEW YORK (MarketWatch) "” When Ben Bernanke goes before reporters in his first live press conference next week, there's one question I guarantee he won't answer: When will you start raising interest rates again?
The Fed chairman may tell the media that the latest round of "quantitative easing" (QE2) will wind up as scheduled on June 30. He also may say that the economy is showing signs of a self-sustaining recovery. But he won't tell us what we really want to hear "” how long it will be before the Fed hikes short-term interest rates.
The dollar plunged to multiyear lows against most major currencies Thursday, as worries about the U.S. fiscal- and monetary-policy outlook made investors reluctant to hold the currency. Jon Hilsenrath and Michael Derby discuss.
However, one expert thinks he has the answer: April 2012, a year from now.
That may seem like an eternity to people who worry that the inflationary wolf is already knock-knock-knocking on our front door. But Joseph Kalish, senior macro strategist of Ned Davis Research in Venice, Fla., thinks it's consistent with the behavior and attitudes of key players on the Federal Open Market Committee, the Fed's rate-setting body.
Kalish has scrutinized minutes of Fed meetings, voting records of FOMC members and public statements by Fed officials to construct a possible timeline of Fed tightening. It's a mixture of "Fed watching" "” which economists did when the central bank was far more opaque than it is now "” and Kremlinology, the art of who's in and who's out at powerful institutions.
Kalish says the key word to describe this Fed is "deliberate." The bank doesn't make big moves until the chairman and his allies are sure they want to go that way. Then, they don't look back.
"Bernanke's not about to change course until he's absolutely certain," Kalish told me. "He's very afraid of tightening too quickly."
He has two key supporters "” vice chairman Janet Yellen and William Dudley, president of the powerful Federal Reserve Bank of New York and a former chief U.S. economist for Goldman Sachs Group. They're firmly in the chairman's corner, according to Kalish.
Two other bank presidents, Richard Fisher of the Dallas Fed and Charles Plosser of Philadelphia, are inflation hawks. They want QE2 to end and the central bank to begin raising rates. Narayana Kocherlakota of Minneapolis generally supports their position.
The four other voting members of the FOMC tend to side with the chairman, Kalish said.
When he does the math, his conclusion is that Bernanke "can get his way." And the chairman is likely to take the slow road back to higher rates.
Read why investors should wait to see the whites of the Fed's eyes before they sell on MoneyShow.com.
Why? Despite nearly two years of recovery, output remains 7% below its September 2007 peak, just before the recession officially began. The chairman worries that deflation is a disease that's devilishly hard to cure once it infects an economy.
So, Bernanke and his allies won't pivot to fight inflation until they're sure the deflationary dog is dead. That, of course, could cause them to fall behind the curve in the fight against inflation. But it's a risk Bernanke seems ready to take. He's said he has the tools to fight inflation and will use them when he needs to. We'll see.
So, what will prompt a change in direction? "The level of the unemployment rate and its rate of change will strongly influence the timing"¦of tightening policy," writes Kalish.
As Bernanke testified before Congress last month, "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be fully established."
According to Ned Davis Research, since 1955 the Fed has made its first post-recession rate hike:
A median 20 months after the unemployment rate peaked
After the unemployment rate had dropped a median 1.2 percentage points
Wall Street analysts more concerned about PC growth outlook and timing of launch of AMD's new chips for the server market than CEO search right now.
6:30 p.m. April 21, 2011
"Japan shares open down; Nikkei slips 0.7% to 9623.0 as strong yen weighs on exporters http://on.mktw.net/eV47L4" 7:04 p.m. EDT, April 21, 2011 from MarketWatch
"PG&E chief retires after "?challenging year' http://bit.ly/h9zjkb" 6:04 p.m. EDT, April 21, 2011 from MarketWatch
"Reminder to all! U.S. markets closed tomorrow." 5:41 p.m. EDT, April 21, 2011 from MarketWatch
"#BP takes off the gloves http://bit.ly/fYcIJ7" 5:05 p.m. EDT, April 21, 2011 from MarketWatch
"PG&E appoints interim CEO, citing 'challenging year' http://on.mktw.net/gE9zM0" 4:40 p.m. EDT, April 21, 2011 from MarketWatch
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