The markets await the Federal Reserve's announcement today as to whether it will lower interest rates again. We have our opinion, explained below. [Update: The Fed did lower the rates by 25 basis points.] But, first, let's look at some of the recent press in advance of this week's two-day Fed meeting that both praise and condemn Chairman Ben S. Bernanke's performance. The first is from Bloomberg:
Bonds, Stocks Show Bernanke Fixing Financial System
Federal Reserve Chairman Ben S. Bernanke is persuading investors that the financial markets are working again. The Standard & Poor's 500 Index gained 7.88% since the central bank backed the purchase of Bear Stearns Cos. on March 16.…
“In the near term, if he's a triage nurse, you have to say he's definitely stabilized the patient,'' said James Swanson, chief investment strategist at MFS Investment Management in Boston.…
Bernanke provided relief to investors stunned after banks reported $318 billion of losses and writedowns.
. . .
"Turned the Corner"
`The markets are giving him credit for having turned the corner and bringing stability back,'' Kenneth Hackel, a managing director for fixed-income strategy at Greenwich, Connecticut- based RBS Greenwich Capital Markets, said of Bernanke. ``Issuers are able to come to market and investors have some confidence in their willingness to put riskier assets back on their books. [Bloomberg, April 29, 2008]
According to our
Elliott Wave Financial Forecast's not-very-proprietary model for forecasting Fed rate cuts -- otherwise known as the spread between the Federal Funds rate and short-term Treasuries -- the Fed will lower rates again today. And as usual, Wall Street may well acknowledge the move by breaking out the party hats. But investors had better be careful, because the pot of gold at the end of every rate cut has a way of dissipating over time. Our subscribers won't be too surprised, however. Here’s what
The Elliott Wave Financial Forecast said last summer when the Fed first cut rates and then again in April when it jolted the markets with an even more concentrated dose of monetary inducements:
The Fed’s extraordinary array of stimulus moves, prompted the usual enthusiasm. “Confidence Returns To Wall Street,” said a headline. But at some point, investors are bound to notice that, over time, the Fed is getting less and less bang out of increasingly drastic stimulus moves. This is just what
The Elliott Wave Financial Forecast said would happen in our September Special Section, “The Unwonderful Wizardry of the Fed.” Despite the Fed’s bid to stem the tide, the Dow is right where it was when the Fed first lowered the discount rate last August. Many are slapping Ben Bernanke on the back for “doing something,” but with much of his perceived ammunition already spent on bailouts and loans before the bulk of the economic contraction is even underway, we say he’s set himself up for a serious lambasting in coming months. The initial signs of attack are already appearing. On Wednesday, angry foreclosure victims protested the Fed’s intervention by entering the lobby of the Bear Stearns’ building and demanding assistance for struggling homeowners. [
The Elliott Wave Financial Forecast, April 2008]
Here again, stocks are no higher than they were on August 21 when the Fed first cut the discount rate by half a point and “Wall Street celebrated” (CNNMoney.com, August 21, 2007). And as the Bloomberg story above indicates, yet another cheer is going up for Bernanke. Clearly, the central bank’s most devoted followers retain their faith in the omnipotent power of the Fed. This makes sense, because the long-term trend in the stock market has been up for decades. As the emerging science of socionomics (the study of the interplay of social mood and financial markets) explains, in a bull market, people project the uplifting force of a rising mood to the Federal Reserve and its leaders. “Most of the time, times are good,” says Bob Prechter in his book,
The Wave Principle of Social Behavior; so most of the time, the country mostly admires the Fed.
The Credit Crisis – A Story That Will Come to an End
Falling markets, however, are driven by the opposite emotional force and thus a completely different picture of ineffectiveness emerges. A new more negative social mood is evidenced by the stock market’s descent from an important October 2007 peak, which may explain an even longer Bloomberg article that appeared April 21:
Bernanke Grapples With Greenspan as Volcker Scorns Fed Bailouts
The piece is part of a surprisingly powerful undertow of condemnation. With former Fed Chairman Paul Volcker, one of Bernanke’s most prominent predecessors, weighing in, we can see the potential for a strong wave of anti-Fed criticism to come. In an April 8 Economic Club of New York speech, Volcker delivered this stinging rebuke: "The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers,'' he said. "A direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in times of crisis: lend freely at high rates against good collateral. It tests it to the point of no return."
Is the Fed’s reputation itself past the point of no return? As we see it, the reversal in stock prices is the key. If it continues, Bernanke will go down, too. In fact, this is the course that
The Elliott Wave Theorist mapped out for the Fed when Bernanke took over. Robert Prechter wrote about “The Coming Change at the Fed” when Bernanke was named Alan Greenspan’s successor in November 2005. You can read an excerpt from
"The Coming Change at the Fed" here.
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