We’ll be broadcasting live tonight at 7pm during Ben Bernanke’s speech at the Economics Club of New York. Everybody will be looking for Fed interest rate clues. That said, I doubt the Fed chair will offer much in the way of new guidance.
In any event, I don’t think the Fed needs to make any more interest rate cutting moves, at least for the foreseeable future. Their shock and awe, confidence boosting, 50 bps rate cut on September 18th has done a good job. It has loosened up the credit crunch, steered the financial system back towards normalcy, and supported the economy with only about 2 percent inflation.
Of course, we are not out of the woods on the credit side yet. Gun-shy investors are still reluctant to invest in asset-backed commercial paper, subprime mortgage loans, or private equity buyout leveraged loans. That’s why banks are moving toward some sort of safety net pool of liquidity to reduce their loan exposure. This will take time.
But the positive stock market message clearly points to a Goldilocks soft landing economy. 3rd quarter GDP could actually come in close to 3 percent, after a 3.8 percent tally in Q2.
Meanwhile, the soft dollar, rising gold, and message of commodities (including oil) strongly suggest that the Fed ought to protect the dollar. Dollar protection is a good theme for the central bank right now. Therefore, unless something turns really sour, I say the Fed should hold its fire on future rate cuts.