Bernanke hints at rate rises while Geithner says credit running out
Posted on 05 April 2011 with 8 comments from readers
Just the hint of a possible US rate rise to a Bloomberg reporter yesterday by Fed chairman Ben Bernanke rallied the dollar, while Treasury Secretary Tim Geithner warned the US will reach its $14.3 trillion legal debt limit by May 16th unless Congress acts to extend this credit.
Rates are expected to rise in the eurozone on Thursday. China raised its interest rates for the fourth time today.
Bernanke said: ‘We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability’.
Rate rise?
This is as close to discussing an interest rate rise that the Fed chairman has come in a long time. It comes as food and energy price inflation are soaring in the US, albeit these two basic necessities are not included in the main inflation index.
Meanwhile, the Treasury has the capacity to extend US credit lines only for another two months until July 8th.
‘The longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations,’ Geithner reported to Congressional leaders.
Newly elected Republicans have been seeking a debt reduction program as alarm at the ever growing US deficit increases, and the risk of an eventual debt default rises.
‘Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover,’ said Geithner. ‘For these reasons, default by the US is unthinkable.’
Bond default?
Unthinkable yes. Impossible no. But what is far more likely is that interest rates will have to go up to attract the capital to finance the deficit, and a more conventional funding of the nation’s debts will indeed be a horrible burden.
The irony of Geithner’s comments is that actually the best way to secure US credit is to stop the runaway borrowing. Any debtor knows that. Last week the Fed printed $69 billion, more than twice the value of global silver stocks – no wonder the price of silver is rocketing.
Inflation is the first sign of unwelcome consequences from the bailout and QE1 and QE2. Higher interest rates are what has to follow one way or another.
For asset prices jacked up by cheap credit, like stocks and bonds this is very bad news. All parties eventually have to end and there are always warnings like these two yesterday.
8 Comments posted by readers:
Rates go up when stimulus package ends which I suspect to be around May or June of this year (most likely June because the FED they will continue to support until June).
RE: Bernanke and Geithner
It’s fascinating to watch these two charlatans on the stage of life.
1. Each delude themselves into believing that they know what’s best for the country, when in reality, they are clueless.
2. In addition to excessive and continuous money printing to prop up the near-bankrupt financial community, each are desperately manipulating everything, in order to paint the illusion that the Obama administration is doing a good job domestically.
As they whisper to themselves: “the stock market is up, so all is well.”
Even if the Fed doesn’t raise the federal funds rate before the end of this year, the market will force an increase in interest rates once the Fed stops buying US treasuries after June (end of QE2). The exit of the Fed will cause a vacuum in the market that can only be filled by investors who will not settle for the current ultra-low rate.
@ Jay:
A very wise person once said that the strongest force in the world is the bond market; so while I can agree with your premise that the [bond] market will force interest rates to rise, I sincerely doubt that this event will occur because the FED “exits” and creates a vacuum in the market.
No Way Out:
The FED has no way out at this point in the movie, and so they will continue to print money (i.e. POMO actiivity, QE activity, etc.) in their vain attempts to prop up the stock and bond markets. That’s the only thing they’re capable of doing; and ironically, going forward, the more of it that they do, the less impact they will have. They won’t announce a “new QE3″ because they don’t have to; they can and will perform STEALTH QE with the $750 billion in recurring annual turnover, as part of their $3+ trillion balance sheet.
re: Bernanke and Geithner. I think we can be unreasonably critical of these two guys!
After all, many many others have messed up before they came into power, and they are faced with trying to ameliorate the disastrous decisions of others, some of whom lived even before B & G were born.
Furthermore, it is reasonable for them to appear to show that they know what they are doing. Why? Because public panic, national and international panic, will only make things worse.
Panic is more likely to lead to anarchy, and anarchy is really bad and dangerous for us all. Better that the politicians, including these two, remain calm as the Titanic sinks. Maybe as it sinks, something will come along to distract the mob. Like war!
@ John Mark:
Yes, there’s merit to your remarks, especially as it relates to “public panic.’
One of the principal issues here is the extensive illegality of their actions, since their tactics amount to fraud & corruption against the American people, and this leads to an irreparable loss of confidence in the US government, not only by its citizens, but to the world at large. Fekete sent a very interesting letter to Ron Paul yesterday on the very subject of this illegality; in essence, the letter implores Paul and the US Congress to impeach Bernanke. Go here for info:
http://www.zerohedge.com/article/antal-feketes-open-letter-ron-paul-impeach-bernanke
There were far more noble and very necessary actions that the US government could and should have taken over the past two years, but they didn’t. One of the most “far-reaching” actions would have been the prosecution of massive corruption and manipulation by the big NY Banks, where there’s hundreds of folks at each of those banks who deserve to be prosecuted. But as Charles Ferguson (Director, Inside Job) said recently in Charlie Rose’s video interview, “not one of these crooks have been prosecuted by the Obama administration”. Go here for a riveting 15 minute interview of Ferguson:
http://www.youtube.com/watch?v=vS0hj4kiqsA&feature=player_embedded
Obewon, thank you for the two links and your reply. This conversation is causing me to think about the US’s style of governance over the decades and, perhaps, centuries as being the real problem here.
In my previous post, I referred to what had happened even before B & G were born, and I had in mind the creation of the Fed. I understand that this happened for the banks and by the banks, and subsequently this bankers’ delight morphed into the Bank of the US in some respects.
I suggest that this was a mistake then, and in the decades since, good governance would have abolished it and put in place a proper mechanism for the people by the people. I don’t mean some Marxist structure but, perhaps, more like the Bank of England and the MPC of the UK.
Both your links deal with the illegality of what’s been happening, and Ferguson makes the interesting point that, if the facts about Lehman had been known (as he says they should have been by B & P), the London office would have been closed down under British bankruptcy law before Lehman collapsed.
Now, I’m not wanting to get into some tribal comparison of the US with other national systems, but rather to think through the problem of governance in the US. Maybe the system of Congress and President is deeply flawed in comparison with Parliament, Prime Minister and, indeed, Monarch who can call the Government’s bluff at any time.
Maybe it has had to take decades and centuries for the two systems of governance to work out their difference in terms of respect for law and punishment of evil-doers. Maybe the US congressional system has to go down before a different and, hopefully, moral system with sufficient checks and balances, can rise up from the ashes.
@ John Mark: You’re welcome.
The Problem of Governance:
You mention “the problem of governance in the US.” The primary problem is a total lack of governance; there’s so much fraud & corruption (& cover-up) in the US financial community and with their buddies in Congress & the Administration that there’s no hope this situation will ever be corrected. I believe this is the fundamental reason why Obama directed his DOJ charlatan, Eric Holder, to look the other way, and not prosecute any of the “very guilty” on Wall St. Sadly, getting $500 million in campaign contributions (in one year!) speaks volumes; but that’s chump change for the Wall St. crowd (yet Ferguson didn’t mention this as one of the possibilities!).
Both Bush & Obama: Terrible Presidents with No Guts:
For those who are not blindly “tied” to any US political party, it takes only a small amount of common sense to see that:
a) Bush “Dubya” was a terrible President in every respect, and then, just when we thought it couldn’t get worse,
b) Obama wows the masses, gets elected, and all his actions, policies, directives, etc. prove that he is worse than Dubya.
Obama, the Multi-Millionaire:
Obama had a golden moment when he was elected; if, in 2009, he aggressively pursued indictments and prosecutions of the fraudulent on Wall St., this country would now be well on the road to recovery (but as a consequence, he’d never get re-elected, because the Power Elite would squash him like a bug). Now just 2.5 years into his “Presidency” he is a multi-millionaire. He is now raising over $1 billion for his second campaign (approx. 10 times more than Dubya raised during his second campaign!).
The Picture is Clear, if One Knows the Rules:
The rules on campaign funds state that money “left over” in a campaign can be retained by an elected official when he/she leaves office.
So maybe the predictions of some folks could turn out to be true; … and that prediction was that Obama would be worth almost $1 billion by the time he leaves office. Apparently, that achievement is far more important to Obama than restoring the American middle class.