Fed Stands Firm – U.S. Economy is more like the Titanic than a speedboat

Bernanke, in his first ever press conference for the Fed, basically stated that the Fed still feels that maintaining rates at their current levels (basically zero), is still the best course of action.  The Fed statement, which is all we typically have to go on since they haven’t changed rates in so long, maintained the same language about keeping rates low for an extended period of time.


The Fed did raise their inflation forecast (CPI) from 1.3% to 1.7% to 2.1% to 2.8%, and cut its GDP forecast to 3.1% to 3.3% from 3.4% to 3.9% (I think we will come in around 2% to 2.5%), for 2011.  They do see improvement in the unemployment rate from previous forecasts, to a range of 8.4% to 8.7% (it was 8.8% to 9% previously).  

For 2012, core inflation (ex food and energy) is now seen running at 1.3% to 1.8%, from the previous estimate of 1% to 1.5%, and U.S. (GDP) growth is now seen at 3.5% and 4.2% in 2012, and 3.5% to 4.3% in 2013.

I feel that the Fed is entirely too optimistic (about everything), and believe that they will be forced to start raising rates aggressively, very shortly.  The U.S. economy, I always say, is like the Titanic, not so much in that is is going to sink (although that is certainly a real possibility), but in that it is a huge ship with a small rudder – changes in rates, even dramatic changes, do not impact the economy for at least two quarters.  If the Fed waits too long to start raising rates, they may be too late to stem the tsunami of inflation.  Also, if they wait too long, they will be forced to raise rates at a much faster pace – so fast that it may stifle the economy.  A slower, more reasonable, moderate pace could be sustained without killing the economy, but they need to start right away (probably should have started about 6 months ago).  

Other countries, like Australia, China, and the ECB (European Central Bank), have already begun raising rates.  This has put even more pressure on the dollar.  A weak dollar can be good for our economy in the short-run because it makes our goods less expensive for foreign buyers.  But, in the long-run, a weak dollar will result in higher inflation, and will demand more drastic rate increases to defend our currency.

Commodity prices would begin to adjust back down, if we were to start raising rates.  We will have to raise rates anyway; it’s just a question of when and not if.  Since we know this to be true, it would make more sense for the Fed to start raising rates sooner rather than later (right now), and to do so at a moderate pace that reduces inflation, including commodity price inflation, and still is slow enough to support continuing economic growth.  I fear they will wait too long (it may be too late already), and by the time they realize their error, they will be forced to drop the hammer on rates, which will feel like we are all getting hit over the head with a giant sledge.  


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