The Fed's worst nightmare - $1,000.00 Ounce Gold! By Paul R. La Monica,
CNNMoney.com editor at large
Last Updated: March 13, 2008: 10:53 AM EDT
Ugly retail sales and a somber
forecast from CFOs point to recession, but rising oil and
gold prices and a weak dollar show inflation. What's Ben Bernanke
NEW YORK (CNNMoney.com) -- It's days like today that will
make many investors wish they stayed in bed.
And they're not the only ones. Something tells me that Ben
Bernanke and the rest of the Federal Reserve's policy-making
committee would like to run and hide as well.
Where to begin? Retail sales for February were shockingly
weak, with sales falling during 0.6% during the month compared
to economists' forecasts of a 0.2% gain. Those numbers put
dents in the argument that consumers would keep spending in
the face of the housing downturn.
Wall Street is also digesting some sobering results from
a survey of chief financial officers released by Duke University
and CFO magazine late Wednesday.
TalkBack: Should the Fed keep cutting rates?
According to the survey of more than 1,000 CFOs, conducted
last week, three-quarters of the respondents said the economy
is either in a recession already or will hit one this year,
and nearly 90% of CFOs surveyed said they didn't think the
economy would rebound until late 2009.
So this means the Fed should slash interest rates at its
next meeting on March 18, right? After all, according to federal
funds futures, investors are pricing in a 72% chance of a
three-quarters of a percentage point cut.
But not so fast.
Gold hit $1,000 an ounce for the first time ever Thursday
morning. Oil is slouching towards $111 a barrel. And the dollar
hit a 12-year low against the yen and a new record low against
the euro. Can you say inflation?
Actually, it's worse than mere inflation. The combination
of rising commodity prices and the weakening growth forecast
for the economy has people worried about 1970s style stagflation.
I hope Bernanke can dig up a pair of old bell bottom pants.
Do the hustle!
"Clearly, the Fed needs to switch to Plan B," noted
Duke professor Campbell R. Harvey in a release about the CFO
But what is Plan B exactly? It's difficult to figure out
just what the Fed can do other than let the credit markets
and housing markets work themselves out, and hope the actions
the central bank has already taken stimulate the economy at
Time may be the Fed's only ally
Even though the Fed's series of rate cuts since last September
- as well as the hundreds of billions in cash and Treasurys
that the central bank has pledged to loan capital-constrained
financial institutions - have failed to encourage more lending
just yet, investors and consumers need to realize there is
a lag effect of several months before Fed policy moves have
an impact. History shows that Fed easing will eventually work
Hopefully, the rate cuts will encourage more banks to loosen
their lending standards again, and will spur consumers and
corporations to start spending more by the end of 2008 or
Plus, even though there is a debate about whether the tax
rebate checks that consumers will receive in the next few
months will really help the economy that much, it's hard to
see how the rebates can hurt.
But as I've said earlier this week in this column and numerous
times before that, the Fed cannot drop the ball on inflation
even if there are more signs of severe economic weakness.
On Friday morning, we'll find out how much consumer prices
rose in February.
Economists are predicting a 0.3% rise in the headline Consumer
Price Index (CPI) number and a 0.2% increase in the so-called
core number, which excludes volatile food and energy costs.
If the CPI figures are higher than expected, the Fed may
have no choice but to disappoint Wall Street next week and
only cut interest rates by a half-point, or perhaps even only
by a quarter-point.
A quick fix for the economy is not what's needed. The Fed
has to ensure that its actions don't lead to the type of double-dip,
or W-shaped recession, that some economists and market strategists
are now talking about.
Harvey indicated this could be the longest slowdown since
the double-dip of 1979 to 1981. But if the Fed holds firm
and doesn't stoke even greater inflation by lowering its key
federal funds rate that much further, perhaps there's a chance
this slowdown will turn into, at worst, just your garden-variety
recession - and not an unwelcome rerun of what happened in
What do you think? Will more rate cuts help get the economy
back on track or should the Fed focus more on inflation?