Notes From Underground: Bernanke’s Suatainable Trajectory

The FED chairman delivers a major address on the economy at the International Monetary Conference hosted by the Atlanta Fed. It seems that the FED is content to stand behind the veil of its dual mandate. Bernanke did a great deal to explain away the transitory nature of commodity price increases, while maintaining that the economy recovery is too fragile and unemployment too lackluster to begin removing the language of … “economic conditions are likely to warrant exceptionally low levels for the federal funds rate for an extended period.” This is very consistent language and unlike the way the S&Ps reacted to the chairman’s speech, I believe that Bernanke’s language was very soft.

Being that the market deemed otherwise, I will wait for price confirmation before trading on renewed stimulus from the FED. While the EQUITY MARKET gave up early gains, the DOLLAR did not rally lending credibility to the idea that the stocks and currency markets are each finding their own fundamentals.

Last night the Reserve Bank of Australia announced that it was holding its overnight lending rate at 4.75%. It cited the growing uncertainty in the global political and economic arenas as the main reason for being cautious. The RBA has the luxury of waiting to raise rates as the very strong AUSSIE DOLLAR is holding import prices down giving them some breathing space. Wednesday afternoon the New Zealand Central Bank will announce its rate intentions and as with the Aussies, the RBNZ is widely expected to hold rates at 2.5% as the strong KIWI, especially against the Aussie, allows the Kiwis to move cautiously as global uncertainty begins to clear. Thursday brings the Bank of England and the European Central Bank to the fore. Both banks are expected to hold rates steady as the economic growth stories in England and Europe are subject to great underlying uncertainties.

Analysts will be weighing Trichet’s words and seem to be desirous of hearing the ECB president proclaim “vigilance” on inflation throughout the land. Trichet has to be careful about offending the EUROCRATS in Brussels as they can make life unpleasant for the ECB by pushing for HAIRCUTS on sovereign debt. I believe that Trichet will not signal any tightening as his term is coming to an end and will not want to create any additional havoc in the EURO-DEBT markets, especially as the EURO is approaching its recent highs. Trichet made his point to the profligates of Europe with the previous rate raise: The ECB is a powerful, independent force. Also, Trichet has proposed the creation of a European Ministry of Finance, a very powerful actor if it comes to fruition and it seems he would like to be its first candidate. The market is thinking “vigilance.” I am urging caution on the part of traders.

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