Bernanke Battling Dissention in Own Ranks?

I’ve been talking a lot recently about how the Ben Bernanke Fed is facing policy challenges from abroad. Central banks the world over have been raising interest rates for months, in both the emerging and developed world. But Bernanke has continued to drag his feet, pledging to keep the easy money flowing.

Now, though, it looks like he could be battling dissention from within his own ranks too! In just the past few days …

* Philadelphia Fed President Charles Plosser warned that “monetary policy will have to reverse course in the not-too-distant future and begin to remove the massive amount of accommodation it has supplied to the economy.” He added that “failure to do so in a timely manner could have serious consequences for inflation and economic stability.”

* St. Louis Fed President James Bullard said “the economy is looking pretty good” and that the Fed should “see if we want to decide to finish the program or to stop a little bit short.” The program in question is QE2, the $600 billion money-printing boondoggle that’s helping drive inflation higher.

Bullard added that “it may be reasonable to send a signal to markets that we’re going to start withdrawing our stimulus, and I’d start by pulling up a little bit short on the QE2 program … We can’t be as accommodative as we are today for too long, we’ll create a lot of inflation if we do that.”

* Dallas Fed President Richard Fisher went even further, telling a European audience that “We’ve done enough” and “we’re at risk of doing too much.” Fisher even went so far as to say the Fed’s dual mandate of controlling inflation and boosting employment should be changed. He wants the Fed to have NO responsibility for employment, and to focus solely on inflation.

With Fedspeak Volume Rising,
It’s High Time to Pay Attention!

There’s no sign … yet … that Helicopter Ben is on board with the tightening trend. Nor are some of his fellow “doves” signaling any intention to end QE2 or raise interest rates from the current range of 0 percent to 0.25 percent. But the hawks are definitely turning up the heat here, and it’s high time that we investors pay attention.

The Fed’s easy money has kept the markets afloat.

Why? Because easy money is a key driver for many of the market moves we’ve seen lately!

But don’t just take my word for it. Ask yourself:

Why does crude oil keep going up and up on the same news? Why do stocks surge right back after every correction? Why do junk bond prices keep rising inexorably higher? Why are stupid loans starting to rear their ugly head again? And why is the dollar falling virtually nonstop?

Because the Fed is always at the ready with billions and billions of freshly printed dollars, that’s why! It’s a monetary policy-driven bout of asset inflation, just like we’ve seen multiple times over the past two decades.

So it stands to reason that IF anything interrupts the flow of easy money — whether it’s the end of QE, a rise in rates, or both — the asset markets are going to get whacked. That’s why the ever-changing tone in Fed remarks is so important to note.

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What to Watch for Next

I’d pay very close attention to the results of the April 26-27 Federal Open Market Committee meeting. Not only will this be the first meeting after these more hawkish remarks, but it will also be the first time the Fed holds a post-meeting press conference.

Yes, you read that right …

Rather than hide behind prepackaged statements, Ben Bernanke will stand in front of the microphone and explain the Fed’s actions. He’s going to do that several times a year going forward — with this year’s briefings scheduled for April 27, June 22, and November 2.

If Bernanke shows any shift toward the hawkish side of the ledger, we’re going to see some real market fireworks. The trend toward a flatter yield curve will likely accelerate, while the stock market could take a tumble.

So get ready … because it may soon be time to make some portfolio adjustments!

Until next time,

Mike

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money, Interest Rates Profits and LEAPS Options Alert. He is often quoted by the New York Sun, Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

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