US Dollar….Not Out of the Woods Yet

January 17, 2008

Just when the greenback starts to recover, we get another piece of shockingly bad news that throws a wrench into the market’s expectation for a 50 versus 75bp rate cut. Yesterday, the stronger consumer prices, industrial production and Treasury international capital flow reports took the pressure off the Fed to cut by 75. Today, the weakest Philly Fed number in over 6 years confirms that the US manufacturing sector is already in recession. December’s -20.9 reading is simply horrid. Also, in contrast to the more optimistic tone of the Beige Book report, Bernanke remains bearish and committed to lowering interest rates. In fact, he repeated that the Fed is “Ready to Take Substantive Additional Action,” which means at least 50bp of easing with a strong possibility of additional rate cuts.

Here are the key points of his speech:

- Any stimulus should be explicitly temporary
- Joint fiscal and monetary measures can help growth more
- Stimulus plan should last for the next 12 months
- Fed stands ready to act in decisive and timely manner
- Fiscal stimulus could be helpful in principal
- Fed ready to take substantive additional action
- Additional Rate cuts may well be necessary
- Futures suggest food and energy prices to moderate
- Inflation should moderate this year and next
- 2008 outlook for economic growth as worsened
- Housing drag continuing in good part of 2008
- Downside risks to growth more pronounced

Link to Full Bernanke Testimony

The Best We Will Get

I still think that 50bp is the best we’ll get. As much as we need a 75bp rate cut, we’ll only get a band-aid from Bernanke rather than a real solution. He’s too chicken to put an end to the pain. Shock us Ben, give us a 75 or 100bp rate cut if you really want to restore confidence in the financial markets. Everyone thinks that you will only be cutting by 50bp. January Fed fund futures have completely priced in the move. There’s a minority that actually hopes that you will do the right thing and cut by three quarters of a percentage point. Long term yields are stubbornly high and if you want them to come down to levels that will offer relief to borrowers with adjustable rate mortgages, you need to do more. Yes, commodity prices are high, but they are coming down. The Baltic Dry index, which is usually a measure for global commodity demand is falling which means that prices could come down as well. But as much as I think that Bernanke should cut by 75, he won’t.

Posted in Bernanke, Federal Reserve, Philadelphia Fed Manufacturing Index, US Dollar, US Economy