By now you have all heard that Federal Reserve Board Chairman Ben Bernanke said that the recession is probably over following a speech last week.
Those words probably don’t mean a lot to those who have lost their jobs or those who will soon lose their jobs as the economy continues to shed jobs, albeit at a slower pace than in the heart of this recession.
What Bernanke probably meant is that when the third quarter gross domestic product report is released, it will show positive growth. This is small comfort to the afflicted and not terribly meaningful given the way the reporting has been manipulated to produce more positive numbers. Some believe this to be the case and others are more doubtful. The disturbing part from our point of view is that the more optimistic voices come from those who never recognized the problem and felt the crisis was over before it really hit in earnest, whereas the more pessimistic voices where the one warning us several years ago.
The Fed will conclude its September meeting in about one hour and will put out a statement. Most experts believe that the Fed will keep interest rate steady. Why? If we are most likely out of the recession, why not begin to raise rates? The current Fed Funds target is 0- 0.25%. If the Fed rose rates to 1%– a substantial action—it would leave rates at an extremely accommodative level.
An annoying theme of the Bernanke tenure is how his assessment of economic conditions does not match his actions. He provided reassuring words while taking dramatic action. There is a disconnect when he downplayed the current crisis prior to the Lehman failure while dramatically cutting rates, creating numerous lending facilities and opening the discount window to investment banks and brokerages — something not done since the depression.
Part of this is understandable. He must avoid creating panic and there are those people who insist perception is reality. As noted here before, if that was the case why didn’t all the happy talk by the previous administration prevent the current crisis.
But his words matter and if he thinks we are technically out of the recession, he should start acting like we are. As we noted a 1% Fed Funds rate is remarkably accommodative especially as there is some quantitative easing left to do according to the Fed. During the last two recessions the Fed did not drop the Fed Funds rate below 1%. The rate was 1.75% as we emerged from the 2001 recession even though the Fed, a full year after, would cut rates to 1% (an action many feel contributed to our current crisis). In the 1990-91 recession the Fed cut rates to a low of 3%. Yes the Fed cut rates from 4% to 3% after we were technically out of the recession but we didn’t know it at the time and we had several quarter of minimal (0.1%) growth.
During the last tightening schedule there was talk as to where the Fed would end. What is the proper interest rate level, all things being equal? All things being equal meaning there is a balance between fear of recession and inflation. That number was believed to be somewhere between 4.5% and 5.5%.
Many analysts believe we have the making for massive inflation ahead of us. And when it hits it will be hard to slow down. Bernanke acknowledged that the economy was still in serious condition but a zero Fed Funds rate denotes a crisis. The Fed stated after the August meeting that, “The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” A Fed Funds rate of 1, 2 or even 3% is historically accommodative and a 1% rate qualifies as exceptionally low.
Bernanke spent much of the speech patting himself and other central bankers on the back for their quick action in averting a financial meltdown. But many people believe the meltdown was just delayed. The outstanding question is, how quick will Bernanke be in addressing a potential Act 2 to this crisis?
Tags: Ben Bernanke, Economic outlook, Fed funds, Federal Reserve
[...] is so bothersome about Bernanke’ comment is it ignores what he has been saying all year. We noted here recently the Chairman’s rhetoric doesn’t match his actions. First he has been talking about improving [...]