Bernanke Speaks, Markets React

Ben Bernanke spoke to Congress earlier today (May 22).  Stocks went up when he started speaking, but ended up going down for the day.

Minutes were released from the FOMC's last meeting and they indicated that some of the members are willing to cut back on the Fed's massive monetary inflation in the coming months (although they didn't say it quite like that).

So there is a fear in the market that the Fed may pull back if we start to see some good economic news, which would include an improvement in unemployment.  On the other hand, Bernanke also said that it is possible that the Fed could actually increase its monthly buying if the economy shows signs of trouble.

This is incredible.  The Fed is already buying $85 billion per month in assets.  This is approximately $1 trillion over a one year period.  And yet the Fed is actually considering increasing this rate of monetary inflation?  It is important to remember that the total holdings of the Fed was under $1 trillion before the fall of 2008.

The 10-year yield went up today, ending over 2%.  While the rates have ticked up in the last few weeks, I don't necessarily consider this a trend.  I continue to predict that rates will only spike up if one of two things happens.  If the Fed stops, or significantly lowers, its pace of monetary inflation over a substantial period of time, then we could see rates spike up.  Rates would go up simply because of a fall in demand for bonds.  Private investors would have to pick up the slack from the Fed's lack of buying.

The other scenario where rates could spike is if we see much higher price inflation.  At this point, we haven't seen consumer prices rise in correlation to the huge increase in the monetary base.  We have seen stocks prices go up and we have seen real estate prices tick up.  On the other hand, gold is down.  Until we see gold going up significantly again or we see an increasing CPI, then I don't expect to see rates going up.

Actually, I think price inflation will be the main indicator for rates.  Because as long as price inflation stays in check, then I expect that the Fed will keep up with some monetary inflation, even if it is less than what we see now.  I think the only way the Fed will stop buying new debt for a sustained period of time is if we see higher consumer prices.  So for this reason, I don't expect a huge jump up in interest rates until we see a higher CPI number and a higher gold price.

There isn't much we can do about the Fed's terrible monetary policy.  These elitists think they can centrally plan the economy.  They are simply misallocating resources on a giant scale.  In the meantime, hunker down.  If you can lock in a low fixed rate for your home mortgage, take advantage of it while you can.  Things are going to get tough.