Tuesday, March 28, 2006

Bernake Buzz

So, the Fed will raise interest rates again today and they will try to assure the markets that they are "almost done". If the stock market interprets this as 1 more rate hike, I think we could rally through the end of the week. There is still a 40% chance however, that the big money thinks almost done is 2 or 3 more hikes and then we could lose 3-5% this week. Tough call, but I'd expect lots of volatility either way after 2pm.

The more interesting scenario seems to be playing out on the global stage. Japan and Germany are experiencing economic recoveries which is bolstering their currencies and their markets (IFO hits 14 1/2 yr high).

So on the global stage, new world economies China and India are experiencing explosive growth, old world economies Japan and Germany are recovering and oil countries are flush with cash thanks to $65/barrel oil.

I continue to believe that in the 2nd/3rd quarter of 2006 Mr. Bernake will be faced with the toughest Fed vote in 10 yrs - our economy will be teetering while the world is experiencing strong growth, do you continue to raise rates to attract foreign dollars to support our Federal and Current Account Deficits (but which may ultimately contribute to a US recession) or do you end the rate hikes because our economy has cooled and risk a currency collapse/3% increase in the 10yr-note?

I don't envy those making that decision as there is no right answer as far as I can see.

No comments: