Seattle Bubble Forum Archive

I am just astounded at how much the press, and financial community, fawn over every word from the Fed governor, trying to divine future policy actions. Today, for example, Bernanke's comments that future interest rate cuts are unlikely has sent everyone (markets included) into a tither.



What boggles the mind, however, is why anyone still believes that Ben Bernanke, or the central bank, has any real say as to what policy actions to take in the first place. The reality is that Fed rates (and broader policies) will be shaped by events. If there should be another financial panic of the Bear Stearns variety, or general stock market decline, does anyone doubt for a second that the Fed won't lower rates and open the lending spigots even further?

The specific philosophies, or intentions, of central bankers is ultimately completely irrelevant in guiding their policies. In fact, attempting to discern the principles and concerns of central bankers can be terribly mis-leading. If you want to know what the Fed will do next, don't listen to Ben Bernanke, watch what is happening to T-bill yields and the stock market. If stocks are crashing and yields are falling, Fed rates are destined to come down. If stocks are rallying and yields are rising, Fed rates will go up.

It's that simple!

Cracks me up when the Fed talks about inflation concerns, when their index doesn't take into account food, fuel or housing. Where exactly do they expect to see inflation then? J6P is already feeling inflation, even if the Fed doesn't see it. Their index seems a bit of a joke to me. Shame that so much rides on it.

If they do actually use the inflation numbers to determine policy, then there's going to be some complications coming down the pipeline. Those low inflation numbers we saw the last 15 years or so were provided on the backs of Chinese exports.

But what happens to the numbers when China wants to charge 8% more next year than this one for TVs?

Personally, I agree with sniglet that things are essentially out of their control. But when the inflation numbers get bad enough I think they'll raise rates, because rampant inflation is among the scariest economic scenarios you can get yourself into.