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Despite all the obvious ineptitude in the U.S. it would appear that the Federal Reserve is under by very astute leadership. Congress had to rant against Chairman Bernanke in his reconfirmation process because even the politically-blinded mainstream media was having trouble keeping the blame from falling on entrenched members of Congress who provided Ginnie and Fannie the unrestricted right to mortgage the future of America to the hilt. So far, little blame has been levied against Americans who borrowed beyond their needs for homes, cars and flat screen TVs. On the other hand, the Fed has been given the task of securing a recovery from “a deep economic wound” and has also been given the added burden of containing inflation in the process.
It is our opinion the Fed is already masterfully controlling the situation with a mechanical discount rate hike that should only impact the banks. It also seems as if the Fed is singing the mantra of leaving rates low to insure the recovery, but at the same time they are heavily in the media with hawkish dialogue that is serving to temper inflationary expectations. What the Fed really wants is to keep rates low to those who need them and in turn give some pause to those who are betting on rising inflationary pressures.
Dovish
February 24, 2010 Fed Chairman Ben Bernanke told Congress that the central bank has “promoted economic recovery through sharp reductions in its target for the federal funds rate and through purchases of securities. The economy continues to require the support of accommodative monetary policies.”February 26, 2010 Chicago Federal Reserve Bank President Charles Evans told CNBC: “I still think it’s going to be an extended period of time that interest rates are going to be low.”
Hawkish
February 26, 2010 Kansas City Fed President Thomas Hoenig (on C-SPAN): “One of the issues that I have dealt with is how do we bring interest rates back to a more long-term sustainable level from their extremely low and obviously unsustainable levels…I think we should be going back to a more normal level sooner rather than later.”March 2, 2010 Kansas City Federal Reserve Bank President Thomas Hoenig told CNBC: “When you have zero rates that go on indefinitely, you are inviting future problems. We know that zero is non-sustainable…the market already knows that.”
It is also possible that recent equity market gains are the result of ideas that politics are leveling out and that the chance for extreme change is being reduced. The fact that the Dollar was seen as a flight to quality instrument in the recent Euro zone debt debacle suggests that the US is still seen as a safe environment. While we don’t have the benefit of knowing the results of the February monthly Non farm payroll report as of this writing, we get the sense that any slightly disappointing readings will be discounted and even that worse than expected readings could be discounted too because of the possibility that severe weather had an impact on the data.
In short, the equity markets and many physical commodity markets have mostly shaken off a series of global tightening moves, a rising Dollar and what continues to be a disappointing recovery pace. We have to wonder how high prices would be if the recovery was thought to be entrenched, the initial rate hikes were thought to be past and Washington wasn’t trying to modify the entire American economic system every two hours. In short, the bull market mentality in commodities lives on even in the face of significant headwinds.
