Fed Speculation Pushes Markets Up
Sometimes you wish the Federal Reserve Chairmen and members would either make up their minds or just be quiet. A couple of weeks ago, Bernanke and other chairmen insinuated that more rate cuts wouldn’t be coming at the end of the year meeting in December, and the market responded by tumbling sharply with several days of triple digit losses. Now, the recent news from Bernanke is that due to weakness in housing construction and sales combines with weak consumer spending may have put another rate cut back on the table.
Bernanke also mentioned the recent volatility in the markets as a contributing factor, stating that his thinking “has also been importantly affected over the past month by renewed turbulence in financial markets, which has partially reversed the improvement that occurred in September and October.” The chairman also stated that, “the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead.”
When the words of the chairman got out last week, investors responded with buying, which sent most markets up higher on the week. Of course, no one is doubting that there are big problems with the American economy–the subprime mess is dragging financials down, while most people believe that there is still more bad news to come, the housing slump is entering Year 3, and there is still a war going on, an election year coming up, and American confidence is extremely low in all branches of government. Not to mention that the dollar is at a 30 year low against most major currencies.
If Bernanke is planning on cutting again, the markets will no doubt respond by ending the year on a high note, and by fueling speculation, the Fed chairman is driving the markets higher. However, if there is no cut in December, traders and investors won’t be having a very Merry Christmas.
