Fed Says What It Means — No Interest Rate Cut

"It took the Fed three attempts after the March 20-21
Federal Open Market Committee meeting — the FOMC statement
issued the day of the meeting, congressional testimony by Fed
Chairman Ben S. Bernanke on March 28 and release of the minutes
on April 11 –before investors and traders finally understood
that an interest rate cut isn’t in the cards."

-John Berry, Fed Says What It Means — No Interest Rate Cut


The author notes how this misubnderstanding came about: "Somehow a lot of people got hung up on the words that were removed instead of paying attention to those that were there."

Of course, you didn’t have to go through all those gyrations. We told you in real time EXACTLY what the Fed was really thinking:

FOMC Statement, Revised for Reality 

Bernanke Testimony (short version)

What is the Fed Really Thinking? 

• Bernanke on Globalization & Inflation (the Stanford speech) 

The minutes make exceedingly clear that there was no move to a neutral position, despite what you may have heard from many spin-meisters. I wish CNBC and Bloomberg would invite all those Neutral NEUTRAL! screaming synchophants and ask them what the minutes mean now.

In their zeal to talk up their own books, they ignore inflation, and do a disservice to everyone else.

Fed Says What It Means — No Interest Rate Cut 
John Berry
Bloomberg, April 13, 2007

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. wunsacon commented on Apr 13

    M3 is far from neutral. The fed stance is pro-inflation. And it seems to be the fashionable way to tax the electorate: real values go nowhere but government taxes the paper gains.

  2. Michael Schumacher commented on Apr 13

    It just goes to show you that whatever the institutions want….they get. lost in this is the serious mis-use of the $$ they get to bloat the futures in the morning(and at night as well), and the SPY during the day. You did’nt need to be a rocket science to figure that out even last week with the NAR #’s release. Front-running at it’s finest.

    As you said in a previous post:” ‘aint finance grand”…


  3. RMX commented on Apr 13

    Let’s not forget that except for Australia and New Zealand, the US has the highest rates among the G10. And yet the dollar index still languishes near the bottom of a long term range. Where do you suppose the dollar goes if Ben actually starts lowering rates?

  4. super-anon commented on Apr 13


    We had significant inflation from about 2003 to early 2006 as the housing bubble and excessive consumer borrowing lead to a rapid expansion of the money supply. However this inflation has begun to slow recently taking the economy down with it (this was a credit-driven expansion).

    The CPI data doesn’t show this yet because that’s how CPI data works – it’s a grossly lagging indicator of actual inflationary forces.

    The Fed is not concerned about inflation; they are concerned about deflation (admittedly not all Fed members share this view, but I believe Bernanke does). They are taking a tough stance on inflation and keeping rates high to:

    a) keep inflation fears from driving long rates up
    b) curb excess speculation, consumption borrowing, and malinvestment, which lead to deflationary forces longer-term.

    The Fed will cut rates aggressively as soon as the economic slowdown overwhelms the excess liquidity threat.

    Asset busts in the past have been disinflationary/deflationary events, especially when credit is involved. What makes this occasion different?

    Any real inflation threat is going to come from the Fed’s response to the economic mess we’re heading into (just as the “deflation scare” in the wake of the dot.com bust lead to inflation).

    It’s silly to talk about “stagflation” when the whole reason the economy is slowing is because monetary expansion is slowing.

  5. vhehn commented on Apr 13

    cramer said again last nigh the fed will cut in may.Cramer seldom right but never in doubt. I still remember when Mrk was in the 20s he said going bankrupt. Today a double since then

  6. dark1p commented on Apr 13

    what super-anon said. wonderfully put.

  7. Richard commented on Apr 13

    cuts are coming in august after the spring real estate market fails to get off it’s hindquarters.

  8. Michael Schumacher commented on Apr 13

    >>They are taking a tough stance on inflation and keeping rates high to:>>

    Rates high? only thing high about rates now is what you have smoked to make that statement.

    Tough stance??.yes I guess by outright lying about the effect of inflation over the last year and continuously changing perceptions about the housing markets affect on the economy is taking a tough stance then I guess it will only get tougher when the data starts to show it where it is…..upwards of 6-7%…but don’t drive anywhere or eat anything because that’s not part of the equation.

    Tough stance on inflation….best laugh I’ve had all day…


  9. Michael Schumacher commented on Apr 13

    Cut rates and you kill the dollar…..as if it is’nt low enough already. Take a look at the EURO on the weekly chart……care to vacation Europe anytime soon? better bring an extra sack of dollars with you to get the same Euro.

    But I guess adding YET more “liquidity” to the system is going to fix it…..too funny.

    We need to lessen the dependance on cheap easy money.. until we do we are only fooling ourselves in the long term. Since you(meaning you and I) can’t “print” ourselves free of debt the fed believes it can and has been for some time now.


  10. Greg Feirman commented on Apr 13

    But what does a “bias” towards raising rates really mean? With real estate tanking and all these people getting late on their loans, is the Fed really going to raise rates? I really doubt it. Of course, with inflation above their comfort zone they aren’t likely to cut either. So they can say that inflation is their primary concern…. but that’s only going to be true until it isn’t i.e. if things get worse in real estate. So, bottom line, they are in neutral i.e. they’re on hold and waiting to see how things play out.

  11. super-anon commented on Apr 13

    Rates high? only thing high about rates now is what you have smoked to make that statement.

    Rates are high relative to what the economy can handle. I’m saying the “tough stance” is partly a ruse, but it is causing a definite slowdown in credit growth and economic activity, so maybe that’s the right word.

    I agree that we have had excessive inflation (that has been understated) as a result of Greenspan’s “easy money” policy. I also agree that rates in the past have been excessively low and that this was destructive and irresponsible.

    The dollar has been seriously devalued by this inflation and is now being further devalued by declining economic prospects.

    I don’t think we differ that much on our viewpoints except I think the inflation we’ve had recently is coming to an end (at least in the short-term) as credit dries up and borrowing slows.

  12. DavidB commented on Apr 13

    Like I said last summer/early fall sometime it will be flat and then up. The market is still adjusting to the return to historical norms for interest rates. When it does fully again then the economy will start ticking up and the fed will be forced to raise

    There is a different helmsman at the wheel now and we are solidly into his new course. The free market is getting the chance once again to do some heavy lifting of it’s own without having to worry about momma Greenspan to come along and chew its food for it.

    Unless we do a major faceplant I can’t see Bernanke interfering. He does enough behind the curtain already.

    I wonder how long it will be before the pundits start chanting about how Bernanke doesn’t do anything and is thus not earning his keep?

  13. MarkTX commented on Apr 13

    Interest rates are artificially low especially for non-investment grade debt.


    Inflation cannot come to an end, it is all that is left for the US economy to “grow” on
    (financial engineering to the max).

    But then again, that is why the economy cannot handle any higher rates.

    financial engineering/artificial growth/inflation

    MS is right…we have to quit our “junkie” habit of cheap money.

  14. Michael Schumacher commented on Apr 13


    Disagree with the statement that rates are high relative to the economy can handle since are we not at a “moderating” boom cycle in our economic history?? That’s what the government #’s want people to beleive. So our economy should be able to handle a raise in rates if, as we are led to believe, we are growing at a “moderate” pace…then I would think we should be able to handle a “moderate” increase in interest rates.

    They should just do it because it would take alot of uncertainty off the table. Yes it would be a painful short term solution that may or may not have larger ramifications down the road. However if we continue to print money and destabilize the dollar further then there is really no choice but to raise rates-you still need more money to purchase goods and services-ala inflation. At least in economic theory that’s how it should work…but, as Im sure I’ll see posted, It’s different this time.


  15. km4 commented on Apr 13

    To break our “junkie” habit of cheap money this country needs this to happen…

    Slowing growth + rising inflation + collapsing dollar = depression / financial crisis

  16. lewis commented on Apr 13

    OK MS, it is different this time.

    But the difference is China/foreign. Used to be we printed up the money, it ran around the country and produced pretty straight forward inflation. Now, we print it up, spend it at Walmart and it winds up in China (well, ok, the Arab states get their share,etc, just using China as the leading example). Deferred inflation. Huge piles of fresh money just taken out of circulation. And as long as this system works, we can print it up like crazy and still have modest inflation, as it all winds up in Treasuries, etc, earning remarkable low interest rates.

    It’s like another government ponzi scheme (hey, its worked with Social Security) But as that fellow with the sword dangling over his head said…..

    So, yes, the short term effect is just the dollar dropping like a rock, but I just wonder how long we can do this cow tipping exercise, cause I don’t think it’s gonna be a good thing when the cow tips over…but till then, party hardy, Fed……

    And I believe Ben and the gang talk a good fight, but he’ll lower interest rates if the going gets tough for the economy, he just needs to learn how to go tell Congress its all their fault because of the deficits before the ill effects of his move kick in. Wasn’t he paying any attention to Greenspan’s moves at all? he needs to start laying the groundwork now…….


  17. Michael Schumacher commented on Apr 13


    I do not disagree with your position it makes sense. However funny money is still funny money as it still ends up back here in the form of China buying our debt. So the journey may have changed and will lessen the affect of it here by slowing down its effect- the results will not.

    Fresh new highs on a friday at the close….could’nt “paint” a better picture.

    Love it.


  18. Si commented on Apr 13

    Its just amazing how the current policy makers are simply unable to live in the real world. Shit happens, real estate has levitated almost to the piont of being unaffordable for the majority of people, they then talk of bailing the whole lot out….to keep it that way. Guess they want everyone killing themselves to pay the mortgage and not thinking too much.

  19. Winston Munn commented on Apr 14

    This is my own perception so feel free to point out the errors of my ways – I promise not to take offense.

    Seems to me that there is a disconnect in thinking as to the inflationary pressures caused by M3. Suppose all the M3 money created over the last three years had simply been put inside a mattress – there would be no inflationary pressure from this unspent money.

    Before excess money can bring to bear its inflationary might, it must have a target, something to spend it on. Because M3 deals with huge blocks of money, it is not a generalized inflationary force – it will only effect the asset it targets. My guess is that target has been commondities and equities mostly for the past 2 years, with some housing thrown in for good measure.

    There also seems to be a misunderstanding of the power of the Federal Reserve. The Fed cannot force money into circulation; rather, the Fed responds to demand, both from government debt and commercial banks.
    Their control of interest rates is nebulous, at best.

    The Fed must monetize that part of government debt not sold through bonds; if next week, the FCBs and private buyers suddenly decided for the forseeable future to cut their purchases of bonds by 25%, the Fed would be in a bind – the only option would be to monetize the difference or increase the value of holding bonds. Monetizing would add to the liquidity and inflation pressures. The only real option would be to increase bond value to woo the lost dollars. With the yield on bonds suddenly at 8%, would any bank lend at the overnight rate of 5.25%?

    The Fed is dependent on recyled dollars (non-moneitzed), to hold inflation in check. At any point in time when the bond purchasers opt for a better return, all bets are off.

Posted Under