Money-Rx Blog

In testimony to Congress' Joint Economic Committee today, Federal Reserve Chairman Ben Bernanke said that "It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly." Scott Lanman, Bloomberg News, on Bernanke's testimony. While the Fed expects the economy to return to its long- term growth pace in 2009, "in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside,'' he said.
Bernanke is scheduled to appear tomorrow before the Senate Banking Committee for a hearing on the Bear Stearns deal and financial markets.

You can read more about that testimony here. And more about today's testimony from the WSJ. Two-straight GDP contractions are the common definition of a recession, though the official calculation used by the National Bureau of Economic Research is more complicated.
The economy should improve later this year, Mr. Bernanke said, assuming a stabilization in housing and credit markets and a boost in spending from the recently enacted fiscal stimulus package. Notably, Mr. Bernanke omitted a pledge he has repeatedly made in recent months to act in a "timely manner as needed" to support growth from Wednesday's prepared testimony. That could signal that he doesn't see much more room to lower interest rates, especially with inflation still, according to Mr. Bernanke, "a source of concern."

True that. I don't see the need for a rate cut right now, and I don't see the markets panicking if the Fed doesn't cut rates. Heck, I'd say the Fed will earn a lot of goodwill if they raised rates by 25 basis points (nobody quote me on that, please). I mean, if the Fed feels confident enough to raise interest rates, shouldn't the markets be infused with enthusiasm that the worst is behind us? That's a win-win situation.

Think about it this way - When the Fed was cutting rates, the markets worried about why the Fed was so scared that it was cutting rates, which added to the panic, which fueled more interest rate cuts, and so on...So now apply that in reverse. The Fed raises rates, investors scamper out of the safety of commodities and come back in to stocks, based on Bernanke's confidence. Perception is reality. That's the market. And this is what the Fed was intended to do - Fiddle with interest rates to help direct investor sentiment. If Bernanke increases rates by 25 basis points, I'll take back everything bad I ever said about him - And his helicopter.