Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
The surging price of oil — whether driven by pure speculation, Chinese demand, geopolitics, or long institutional futures bets — is driving a sea change in US economic calculations. And one can see from today’s release of the minutes from the April Federal Reserve meeting that Chairman Bernanke has reverted to what is becoming a traditional Spring ritual — using the minutes to jawbone the value of the US dollar upwards, or at least build a firebreak against further deterioration in its value.
Clearly enough, the Fed is worried about inflation especially in commodity prices stoked by the dollar’s fall as the Fed aggressively cut the funds rate in an atttempt (thus far technically successful) to ward off a recession. (Who says the Fed cannnot try to deflate asset price bubbles?) But is the Fed sending an even more meaningful signal in today’s release (after all, they get three weeks to shape the minutes to say exactly what they want them to say) that the Fed is quite willing to risk a recession in order to pre-emptively attack the risk of inflation. The stock market seemed to react as though this latter message was what it heard most loudly: and why not, when the minutes themselves said even a “contraction” should not alter their new pause bias. And Board Member Warsh amplified today the same thoughts with his dismissal of calls for further rate cuts in the face of further economic deterioration as “reflexive”. (Of course, the Fed itself knows a little something about “reflexive” rate cuts, especially when threatened with a sharemarket meltdown.)
So we may be about to head back to the days of late last Summer and early Fall when the equity markets and the Fed engaged in a tussle over whether the risks of recession and inflation were in fact evenly balanced (as the Fed then said right through October despite the credit meltdown and housing crisis) or whether recession was a much greater threat — as the equity market perceived and attempted to signal by periodic bouts of swooning several hundred points down per day.
We can expect then more days of a a sort of stock market “Victorian fever” as institutions and individuals take the measure of the risks inherent in the Fed’s new stance and attempt to again force the monetary authotities to “blink” as it has in the past) in the face of the potential for a stock market crash (just what the doctor ordered in an election year).
Most worrisome to the markets is the prospect that a banking analyst at Oppenheimer (Meredith Whitney) is in fact more clued-in to the financial and credit market realities than the Fed is. Specifically, her predicted “other shoe” credit card rollover freeze-up in the face of new regulatory restrictions on issuer fees and flexibility which will, by her estimation, wipe out $2 trillion or more of consumer credit along about year end, and in turn trigger another round of massive defaults and bank receivables write-downs (not to mention the “negative feedback loop” in the overall economy that the Fed now wants us to think that IT THINKS is a diminished risk).
Perhaps the Fed’s willingness to again play at least a minutes game of ”chicken” with recession in order to flex its anti-inflation muscles will carry the day with the dollar and gradually take some air out of the oil bubble…for a while. But let’s also be a little “data dependent” ourselves and watch out for rising credit card defaults, May unemployment, more airline (not to mention personal) bankruptcies and rising mortage rates in the face of the inflationary expectations the Fed has now itself somewhat legitimatized by its own forecast.
