Robert Novak is No Fed Expert !

Everyone seems to be all abuzz about a Robert Novak column in today’s Washington Post.

"Speculation that the Federal Reserve is about to begin inflation-fighting interest rate increases appears to be dead wrong. Fed Chairman Ben S. Bernanke is worried more about runaway oil prices contracting the global economy than inflating it through a wage-cost spiral. According to sources close to him, America’s leading central banker has no plans for a raise."

I don’t expect Fed hikes anytime soon, but it has nothing whatsoever to do with Novak’s column. In fact, so far, Novak is a perfect contrary indicator when it comes to the Fed. His column back in August 16, 2007 was titled "A Rate Cut on Hold." 

The very next day, the Fed cut the rate at the discount window 50 bps, beginning an easing cycle that took Fed Funds and Discount rates down to 2% from 5.25%.

Fed Funds Rate On Hold? Not Exactly
click for ginormous chart


Source: Economagic

Let me frame the question differently — Novak’s "A Rate Cut on Hold" article out in August — the day before the discount rate cut, and a few weeks before the September meeting, where the FOMC cut 50 bps.

Source: Bloomberg


Novak’s source is rumored to have been "Calamity Bill" Poole, the the St. Louis Fed president, who declared that only a "calamity" could make the Fed ease — exactly one day before the discount rate cut on Aug. 16.


UPDATE II JUNE 17 2008: 2:41pm
We mentioned that in response to the WSJ and FT articles on the FOMC, fed funds futures had reduced expectations of
a 50 bps hike by Oct to 28% from 60% yesterday.

Right now, those odds are down to
14%. The odds of 25 bps hikes at each of the Aug and Sept meetings are down to
58% vs 70% this morning and from 98% yesterday.

UPDATE JUNE 17 2008: 6:42AM
Today’s WSJ column "Fed Mood Tilts Away From Rate Increase" is having an
Yields are also down
across the yield curve.

The fed funds futures expectations for rate hikes are also being impacted: The odds of 25 bps hikes at the
August meeting  is down to 70% from 98% yesterday, while September is off about the same amount. 
50 bps are
still priced in by the Oct meeting, while the odds of a total of 75 bps by then are
down to 28% vs 60% priced in yesterday.


Attention Robert Novak: The Fed isn’t at Neutral (August 16, 2007)

The Fed’s Rates Dilemma
Robert D. Novak
Monday, June 16, 2008; Page A19

A Rate Cut on Hold
Robert D. Novak
Thursday, August 16, 2007; A15

Poole Says Only `Calamity’ Would Justify Rate Cut Now
Anthony Massucci and Kathleen Hays 
Bloomberg, Aug. 16 2008

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What's been said:

Discussions found on the web:
  1. Marcus Aurelius commented on Jun 16

    Novak is no friend to truth, integrity, or journalism. He is a tool by every definition of the word.

  2. Ed H commented on Jun 16

    Touche. Novak is a political insider. And it’s June to boot. What he says now has zero significance in terms of what does eventually happen. However, it does lend credence to the fact that the Fed is NOT as hawkish as the market seems to believe at the present time.

  3. Ed H commented on Jun 16

    Oh, and as Marcus Aurelius says, even on matters political )as we saw in the Valerie Plame case) Novak is not an honest broker. He cannot be trusted.

    But his column does highlight the point that it’s not a foregone conclusion that the Fed is hiking.

  4. bluestatedon commented on Jun 16

    Count Novakula is exhibit #1 for what lows the field of journalism has fallen to.

    And speaking of idiot journalists, I’ll add this Homan guy to the list:

    Homebuilder Confidence Index Unexpectedly Fell
    By Timothy R. Homan

    June 16 (Bloomberg) — Confidence among U.S. homebuilders unexpectedly dropped this month, signaling the housing slump may worsen.

    It’s only “unexpected” if you’re delusional or a shill.

  5. franz commented on Jun 16

    Actually, at this point, a FED hike might actually do well to convince the long bond holders that the FED is serious about inflation. If you look at the short term ARMS and 30 year dixed, the rates have jumped at least 30 bps. If the FED raises 25%, they could calm the market and possible move the long term rate down to help home owners. Now, they may have to cut down the line after this due to slow economy.

  6. dave54 commented on Jun 16

    FEDS DILEMMA: This time round, aggressive rate cuts have yielded a falling dollar,
    that the markets then offset with higher oil, gold & grain prices, fueling inflation.
    Also given the likely monetization of future unfunded entitlement obligations, plus
    the projected multi-trillions global warming will cost, and interest rates may only
    be headed higher for the next couple of decades, until a hyperinflationary blow-off
    forces Congress to stop throwing money at every problem, and instead consider more
    practical solutions?

  7. upsidetrader commented on Jun 16

    … and look where the experts have gotten us

  8. grumpyoldvet commented on Jun 16

    Facts are/were never a strong suite for Novak, thus the nickname “No Facts Novak”….OTOH…he is a political insider & at times does get the gossip correctly….

  9. Paul commented on Jun 16

    “America’s leading central banker has no plans for a raise.”

    I think he was just talking about his salary.

  10. Mike in NOLA commented on Jun 16

    It’s a real shame that the credibility of Bernanke, the Treasury, and Wall Street is so low that we are tempted to listen to Novak to figure what the truth is. But hey, he has been used to convey secret info before, even the name of a CIA agent :)

    Doesn’t seem like Bernanke can afford to make foreclosures worse. Hussman has an interesting graph showing that we are really still on the upslope of mortgage rate resets and will be til the end of the year:

  11. stuart commented on Jun 16

    I wholeheartedly agree with Marcus’s comments and those of similar sentiment, nevertheless, just as a broken clock is correct twice a day, in this case, so is Novak. With this crap now sitting on the Fed’s balance sheet, raising rates will now directly damage themselves.

  12. Jay commented on Jun 16

    Ooops…thought I was reading the Huffington Post. IMO, I think the broken clock is correct this time.

  13. Jim Haygood commented on Jun 16

    “Fed Chairman Ben S. Bernanke is worried more about runaway oil prices contracting the global economy than inflating it through a wage-cost spiral.”

    Back in the ‘good old days’ of the first and second oil shocks, it was well understood that oil shocks percolate through the price structure of the entire economy, and the central bank needs to lean against them. That’s what Paul Volcker did when he cranked Fed Funds to double digits.

    Now, a bizarre inverse theory [quoted above] has developed: namely, that an oil shock retards economic growth, and may actually require EASING. Problem is, this oil shock is very much a function of a weak dollar, which itself is both a symptom of excessive ease (i.e., too low interest rates), and a form of backdoor easing (a weak dollar provides a tailwind to exporters and multinational earnings).

    By analogy, it’s a ‘hair of the dog’ prescription: if you’ve eased too much and gotten a headache from the aftermath, just EASE SOME MORE. The U.S. Ponzi economy is addicted to credit, and crack dealer Ben thinks it’s time for another hit. Share the bong, Ben; we’re hurtin’.

  14. FriendOrFoe commented on Jun 16

    Novak, needs to be investigated. Has anyone looked into what stocks his Nanny has been buy or selling?

  15. Mike in NOLA commented on Jun 16

    Jim Haygood is right with respect to oil, but that’s not the worst of our problems. While oil makes the headlines, huge, worthless amounts of mortgage securities, people losing their houses, and the seizing up of the credit markets are still the biggest problems. The oil bubble will pop on it’s own. The credit market won’t fix itself. The reckoning has only been put off by the Fed’s actions, not really avoided.

    You have to like this portfolio mananger from Fifth Third commenting on Lehman’s earnings report today. I wish everyone would give answers as direct as his. Click the link below.

    Fisher of Fifth Third

  16. Joe commented on Jun 16

    I don’t think Novak is just a bad journalist, I think he is the worst that ever lived. Robert Novak has no respect in the field and is wrong about everything all the time.

  17. Bob A commented on Jun 16

    well Joe… there are a lot of worsts but he’s definitely one of them

  18. pft commented on Jun 16

    If they want to creat a global depression, and a great depression at home, the Fed will increase interest rates ala Volcker style.

    How increasing interest rates helps inflation, when it is due primarily to market manipulated food and oil prices, and while there is wage deflation and increasing unemployment, is beyond me.
    Of course, Depressions are deflationary since people can no longer afford food and oil. Many people died of hunger in the great depression when farmers were given subsidies not to release food that was not affordable at “market” prices that ensured a healthy profit, to the market. If left to the free market, prices would have plummeted to what people could afford and reduced profits of the big farmers. But business hates free markets.

    Yet I have no doubt intrest rate increases will come. Perhaps it will wait until Obama gets in, or until after the elections. Obama is backed by Volcker. It’s effects will be devastating and will be the end of the USD as the reserve currency and our superpower status. This is a necessary step for Globalization, and a World currency is already being discussed.

    One of the reasons Volcker increased interest rates was to get 3rd world nations to default on their debt and force them to open up their markets, and make debt slaves out of them with the help of the IMF. He was a neo-liberal Free Trade advocate of the Chicago School of Economics.

    The interest rate increases faciliated globalization, since the combination of wage inflation with the increasing costs of capital, meant manufacturers had to export manufacturing to countries with low cost labour instead of compensating for expensive labour with investment in technology at home that would increase productivity and make them less dependent less on labour.

    It also halted the expansion of nuclear power, making financing too expensive, which served the Big Oil interests. Once the oil shocks were over, Big Oil then brought prices way down while interest rates remained high, and in this way, they were able to eliminate what was left of the competition in the domestic oil industry, as they were unable in invest in new wells, and the wells that were drilled while oilprices were high and financed at high interest rates, became money losers.

    The myth that OPEC controls prices remains though. Having loads of oil means nothing without the ability to get it, store it, refine it and transport it to those who use it. That is controlled by the Big Oil cartel.

    As an example, Iran can not refine their own oil since Big Oil will not sell them the equipment or replacement parts. So they import gasoline at 140 dollars a barrel and sell it to their people at 40 cents a gallon. Big Oil does not pay market price for oil, although their refineries in the US do. The profits get locked in at the tax free havens where their tankers are registered.
    What gets reported as profit is a fraction of the total.

    Interest rates increases today will result in the US defaulting on our debt, and so we will have to go to the IMF for credit. Having to deal with the IMF means selling your soul to the devil. We will be toast.

  19. VennData commented on Jun 16

    Be careful what you say. The Fed is down to just four voting members.

    If they start hanging out with Novak any one of the may storm off their jobs swearing at their critics. That will leave them without a quorum and interest rates will be stuck at two percent until Barack Hussein Obama brings the whole nation together as one or James Carville kicks, and is, as he’s often quoted, “…comes back as the bond market were you can intimidate everybody.”

  20. bdg123 commented on Jun 16

    When did we ever care what a political reporter had to say about the economy? Monetary policy? Next thing you know Novak will be ‘outing’ Bernanke as a CIA operative.

    Today while enjoying my large portion of extra delicious salty tater tots at Sonic I talked to half a dozen customers who knew more about the Fed than Novak. Did he run out of tawdry and salacious stories to report? Should Novak reach his level of competence, he’d come back to life as a Yankees beat reporter for the NY Post.

  21. JL commented on Jun 16

    Wrong headline. Should’ve been:

    Robert Novak is No Expert. In Anything. Period.

  22. eh commented on Jun 17

    We had a calamity — the stock market declined.

  23. Bill King commented on Jun 17

    Mr. Novak: Fed Chairman Ben S. Bernanke is worried more about runaway oil prices contracting the global economy than inflating it through a wage-cost spiral. According to sources close to him, America’s leading central banker has no plans for a raise. [With no G8 comment, this killed the dollar.]

    Saying Ben is more worried about runaway oil prices than inflation [wages] is contradictory because runaway oil prices are inflationary. It’s illogical – being worried that runaway inflation of oil will contact the economy, so Ben’s more worried about recession that inflation!?!?!

    If Bernanke still believes that inflation is tame because there is no wage inflation, he’s an idiot or elitist centric like the people that have propagated this crap for years. Employing reductio ad absurdum, the developing world has not had to worry about wage inflation since creation yet those nations have been continually plagued by runaway inflation when their governments or central banks try to paper over collapsing living standards and price increases in the necessities of life.

    The dopes that ran the Fed in the ‘70s believed what Novak’s sources told him – runaway oil prices are deflationary because they contract the economy – so the Fed should pump like crazy to offset the contraction. As absurd as this sounds now, solons propagated this stupidity three decades ago. It unleashed the highest US inflation since the Civil War & job cuts. As we have noted, the Ford and Nixon retreads that are now powers-that-be are replicating the horrid mistakes of the seventies…All we need now is a President Obama, with an even more Democratic Congress, doing a ‘Jimmy Carter’.

    Perhaps Mr. Novak sources are bagged Lehman and other financial stock holders. Supply-siders usually have Bob’s ear.

  24. me commented on Jun 17

    What everyone said about Novak. I read Valerie Plame’s book and it is a shame what they put this woman and her family through. Between torture and outing CIA covert agents there are quite a few Bushies that belong in jail.

  25. notBB commented on Jun 17

    Were I BB I would consider using market responses to rumor as a way of checking my own intuition as to how a policy change may play out and I’d want to make sure that the rumors got out.

    With that in mind, who should BB call?

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