Tuesday, August 7, 2007

I Like That Ben Guy

I like that Ben Guy

This is not Alan Greenspan’s Fed anymore. Ben Bernake & Co. hit a home run today, by doing nothing. With the market pretty much evenly split on whether the central bank should lower rates to give some support to the fixed income sector or keep the rates at current levels or higher due to the risk of inflation (and not to mention those tired of bubbles), the Fed did nothing and pretty much appeased both sides.

What Ben & Co. has been saying for over a year is that inflation is their biggest concern. Pretty much every analyst was certain the rate would not move today but were looking forward to what the Fed had to say about the mortgage mess, and the financial market. Many analysts were expecting the Fed to say something along the lines of that downside risks were now equal to the risk of inflation. If the Fed had made this statement, they tip their hand too much and scream, “Next move, DOWN!” The stock market would have shot straight up and treasury bonds would have been pummeled. If the Fed made no mention of the condition of the financial markets or made a firm statement that no change was coming, you would have seen a flight to quality in treasury bonds and the stock market sink.

What the Fed did was pretty slick. Here is the exact statement:

"Although the downside risks to growth have increased somewhat, the committee's predominant policy concern remains the risk that inflation will fail to moderate as expected."

So think of it this way. The Fed holds the keys to both in “Increase” door and a “Decrease” door. They have been holding the “Increase” door open for 17 straight increases and a year’s worth of doing nothing. The “Decrease” door has been shut and locked up tight. The Fed kept the “Increase” door open but the have unlocked the “Decrease” door. It’s not open, but at least there is a chance.

At first the market reacted negatively to the statement with the Dow sinking more than 120 points in the first few minutes of the statement being released but then the market rebounded and gained. The market ended the day relatively flat. The same can be said about the treasury market.

So in a day that could shape the future of the economy for the next few months, the Fed did nothing, and nothing happened to the markets. Which is exactly what the Fed was hoping for.

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