Ben Bernanke‘s shock and awe, frontloading action to slash the fed funds rate 50 basis points from 5.25 percent to 4.75 percent (which I predicted, see Goldilocks 2.0) is just what the doctor ordered.
This is Mr. Bernanke’s coming out party. It’s his Fed now. In one fell swoop, yesterday’s move wiped Alan Greenspan off the front pages (thankfully).
Tuesday’s Fed’s action ultimately boosts financial confidence and reduces the cost of money. This in turn will help stabilize, even boost asset values across-the-board. It moves us away from the punitive inverted yield curve. It’s pro-growth and it will increase the demand for money by reducing the interest cost of money.
Tight money had been strangling the low tax rate on capital and investment. So the Fed’s easing move will revive the investment incentive effects from the supply-side tax cuts. The idea here is that the Fed had been squelching them and now is liberating them. Now the reduced interest tax on money has become more compatible and congenial with the low tax rate cost on capital.
The inflation hawks out there will be disappointed because stronger investment and growth will absorb liquidity and reduce the inflation rate.
Across the pond, the European Central Bank and the Bank of England may follow Bernanke’s lead. They of course are suffering from the same problems we are.
I think this is ultimately bullish for stocks, bullish for the economy, bullish for the dollar, and bearish for gold. It will take some time for these things to work themselves out, but these are my expected outcomes.
Politically speaking, this sets up 2008 as a much better year for the GOP’s bid to capture the White House. While the economy is in low gear, and will remain so for at least another six months, a brighter economic picture is in the cards.
Goldilocks 2.0 is not as good as Goldilocks 4.0, but bravo for Bernanke. I give him three cheers and a big thumbs up.