Goldman CEO Lloyd Blankfein, speaking in Tel Aviv on Wednesday, said ‘chances are’ the US is not in a real recovery; the recession is likely to be long and protracted; and the recovery will be shallow. The Street quickly surmised that Goldie must be short the stock market.
The Fed, via Jeff Lacker, engaged in more verbal intervention on Wednesday after Russia hammered the dollar and boosted gold during European trading.
BN: Russia May Swap Some U.S. Treasuries for IMF Debt Russia may switch some of its reserves from U.S. Treasuries to International Monetary Fund bonds, the central bank said today. The comment drove Treasuries and the dollar lower.
The above Russia story pushed the dollar lower and gold higher during European trading. But the trend reversed about a half hour before the NYSE open.
BN: The Federal Reserve must avoid the risks of “waiting too long or moving too slowly” to tighten monetary policy once an economic recovery begins, Richmond Fed Bank President Jeffrey Lacker said.“The challenge for us on the Federal Open Market Committee will be to shrink our balance sheet and tighten policy soon enough when the recovery emerges to prevent rising inflation,” Lacker said today, without specifying the timing of such a move. “The danger will be that we will not shrink our balance sheet enough when the recovery emerges.”
In order to save banks and the financial system, the Fed and administration absorbed an inordinate amount of private sector debt and risk. The solons also inflated stocks so banks and others in need of capital could procure funds. This has forced the bond and dollar market to revolt.
Now, the Fed and administration must save the bond market and dollar. This implies sacrificing stocks, which is more palatable now because banks have raised beaucoup capital and the system is not in implosion mode…PS – This is why about four weeks ago we said the Fed should consider hiking rates.
Here’s the logic behind hiking rates: If the Fed continues its present course, bonds will continue to tank and higher rates will kill stocks and the economy. There is also a very good chance that the dollar would continue to implode, which would foster inflation. This is the worst of all worlds.
If rates are hiked, stocks will fall but bonds and the dollar would improve. There probably would be little change in financing costs for consumers because the yield curve should flatten. Commodities and inflation should decline.
And banks have raised enough capital for the Fed and administration to now try to save bonds and the dollar by jiggling rates a tad higher.
WSJ: The Fed’s beige book survey released Wednesday shows that economic conditions remained weak and even deteriorated in many regions of the country, with commercial real estate and labor markets continuing to face challenges.