The Time For Fed Action Is Now

There was some heat being generated on Larry Kudlow's show last night as all of us, Kudlow, Farrell, Michael Pento, and Jack Gage of Forbes all read the markets horrendous action the same way. The downturn was a complete in your face repudiation of the Fed's decision to not raise rates. Gold soared, oil went up over $5 and the stock market plunged as a refusal to defend the dollar fueled fears that inflation will rise.

Inflation is the cruelest form of taxation. It eats away at buying power and once uncorked, it's very hard to contain. I know the concept of "core" inflation drives everyone crazy. A measure that excludes food and energy seems useless. But it is an important gauge to measure if the "headline" number is percolating down and becoming imbedded in the general price level. So far it has not. The core rates of inflation are moderate, but I fear they won't stay that way unless we raise rates, strengthen the dollar and bring the price of oil down.

One of the reasons the core rate of inflation has been well behaved is that wage rates and wage demands have been modest. But the WSJ reports the Conference Board's June survey of consumer sentiment showed Americans believe inflation over the next 12 months will be 7.7%. That's up from 6.8% in April, 5.4% in February, 5% last September, and the highest in 20 years. Those expectations are being fueled every time you pull into a gas station. They will soon enough begin to show up in wage demands and price increases throughout the economy.As these inflation expectations become more firmly rooted, the harder they will be to change.

The Fed, in its recent statement, implied that it believes the economy's weakness is temporary and they said "overall economic activity continues to expand." Recent reports bear that view out. Dennis Kneale, ever the clear voice, mentioned on the show that existing home sales rose 2% in May. I would guess that was due to prices getting low enough to attract buyers despite mortgage rates having moved up a bit. First quarter GDP was revised up a tad to 1%, and Q2 GDP looks like it's tracking toward the same number due in part to the tax rebates.

Unemployment claims, one of my most closely watched numbers, were 384,000 and the four week moving average was a moderate 378,250. Below 400,000 indicates the economy is still expanding. Incidentally, Morgan Stanley noted in a recent blurb the recessionary average for claims is 470,000.

As Dennis pointed out, not all the news is bad. Even a couple of the stocks that got pummeled yesterday, Research in Motion and Oracle, had very good reports, but when negative sentiment prevails, nothing is good enough.

The time for Fed action is now. As the election gets closer, the political weighs ever more heavily. There is good news but it will be overturned by an ever weakening dollar and an escalating oil price. Ben, take note of what the market is saying and raise rates.

Comments

[seawolf77]

Oh Please. Do you really think dorky Bernanke can do anything. Inflation is about one thing and one thing only. The basic building blocks of your society just got mroe expensive and there is nothing you can do about it. Energy. It costs alot more, a whole lot more to find and produce and refine oil today, natural gas very soon, and coal about a year from now. So everything you do just got more expensive. Period. What can we do ? Conserve. Cut back. Sounds positively anti-American. Well consider this. Maybe American ain't so great any more. If it ever was. We have been pigs so long the trough looks like Redondo Drive. The big fat pig next to you looks like a Cadillac Escalade. The farmer getting ready to slaughter you becasue you are too expensive to feed and pork bellies are going thru the roof looks like....YO­UR PRESIDENT!

[CharlesMac]

"I know the concept of "core" inflation drives everyone crazy. A measure that excludes food and energy seems useless. But it is an important gauge to measure if the "headline" number is percolating down and becoming imbedded (sic) in the general price level."

Just to make your point.... Gee, I always wondered for what that abomination of a statistic was used.

And i give you credit for being consistent­..... July 26, 2005.... your quote...
"Since 1971, there have been six major periods in which the Feds raised rates. The market almost always went up afterwards­."

As an asset manager, i guess that would be of concern to you. Scotsman trades heavily in equities.

Also i am sure the U6 unemployment number (9.7%), of unprecedented long-term unemployment is not much concern, as your company isn't really interested in including their pennies in your AUM.

Or that historical demand destruction and personal asset deflation is taking place in the US and Europe. Hey, what the heck, just buy companies that are ready to hit their stride in Asian and South American markets.

Great idea. The $4.3 trillion in household debt needs an interest bump on every variable rate out there. I'm sure $200/bbl oil and 10% interest rates would be just the ticket.. I can just imagine the spread lenders will demand when money really is tight.

You supply-side worshippers have eaten the seed corn.

Look around the country, see what you have won.

[FogBelter]

Without a freeze of Mortgage Rates wouldn't a rise in the Interest Rate exacerbate an already bad situation in housing, which was the reason for the economic downturn to start with? As I understand it we are barely 1/3 of the way through the mortgage mess ... in theory, wouldn't further tinkering with rates just make things worse? And we are starting to see shakiness in Credit Card repayments as well ... I think the Fed has to sit on its hands a few months.

[Aaror]

I like inflation
Here is why...
If you owe more than you own, which now described most of the US middle class, the less your dollars of debt are worth, the better off you are.
If you are a Federal Govt. drowning in debt, the less the dollar is worth, the easier it will be to repay.
Now, if you are a rich person, whose money will decrease in value, I can see how inflation is a bad thing, but you know what, I think something that helps the middle class and hurts the rich doesn't qualify as "regressive," no matter how many times you say it on TV.
Oh, and if you are a rich person, paying less in taxes than the middle class, and you know that having to actually pay for the national debt is going to require you pay your fair share, it is a bad thing...

[Henry]

The central bank rates of Japan, Gr Britain, Europe, and the USA are:
0.5% 5.0% 4.0% and . . 2.0%

Simple question boys: What happens to the group if the rate of each has to change
to 4.0% (the Euro Rate)????? I mean the fx values of the U.S. dollar to the Yen, the Pound,
and the Euro? (And then you have the Yuan to consider). In the free enterprise world of the invisible hand, these differences would be competed away, right? Is this really free enterprise?? It really is as fixed as Vegas. The house wins, and have a nice day.

[Henry]

Vince,
Whaddaya think about the BOJ with bank rates at 0.5%? Think a little of our problem comes from Japan. I hear the dollar has 40% to depreciate to the Yuan and the Yen? Is the invisible hand of the market awol? Time for Bretton Woods II?

[shrinqrap]

Vince! We've missed your sage advice since Lou Rukeyser went off the air.

So much for "Mr. Market" not needing a hand:))

[biwee]

Clearly, it is much more important to the private bank called the Federal Reserve (check out
which group owns most of the FED) to bail out their criminal buddies on Wall St with artificially LOW interest rates than it is to strengthen the dollar and put a damper on what will soon be very bad inflation. Greenspam and Bernanke are traitors. They have NO loyalty to America.

[BassMonk]

The action we need from the Federal Reserve is for them to cease to exist.

[joebhed]

Hear! Hear!!

And replace it with what?

Wildcat Banking?

The Chicago Plan?