Wall Street Turns to Bernanke
Some want a rate cut now, but the Fed will see you in September
Wall Street wise guys used to mock Federal Reserve Chairman Ben Bernanke as "Helicopter Ben" because he once spoke approvingly of a Milton Friedman money metaphor about how a "helicopter drop" of greenbacks could stop prices from collapsing. But lately the big-money types have fixed their eyes firmly on the skies, searching hopefully for a Bernanke air rescue from the spreading subprime mortgage crisis.
In a now notorious (thanks to YouTube) rant on CNBC , money manager turned TV personality Jim Cramer urged Fed action as he blasted Bernanke for doing nothing to ease the pain: "Bernanke is being an academic! It is no time to be an academic. ... He has no idea how bad it is out there. He has no idea! ... We have Armageddon!"
And since that public financial freakout, the bad news has continued to flow about the mortgage credit crunch, and stocks have continued to fall. Not that the Fed has done nothing. Over the past week and a half, it has injected tens of billions of dollars into the banking system via short-term loans to help keep credit markets orderly.
But Bernanke has a far bigger financial weapon in his arsenal: cutting short-term interest rates. The federal funds rate has been stuck at 5.25 percent since June 2006. Are Bernanke and company finally getting ready to cut rates to keep the mortgage meltdown from dragging the economy into recession?
No flinching. Money manager Louis Navellier thinks so. As he sees it, the crisis is a potential $67 billion mess in a $14 trillion economy, so probably "the problem is getting more attention than it deserves." Indeed, the underlying economy still looks pretty robust. Many economists now think growth topped a 4 percent annual rate in the second quarter, not the 3.4 percent first estimated by the Commerce Department. But Navellier worries that the torrent of bad lending news is "creating a lot of fear. ... That's why the Fed is likely to cut rates soon. ... Fear can lead to panic, and the Fed does not want to get anywhere near that." Many on Wall Street agree. Short-term-interest-rate futures contracts are now trading as if a quarter-point cut at the Fed's September policy meeting is a deadlock cinch.
And since one-and-done rate cuts are rare, explains Stuart Hoffman, chief economist at PNC Financial Services Group, there might be several rate reductions over the coming year, bringing the fed funds rate down to 4.5 percent by next summer. But Hoffman thinks the Fed won't pull the trigger until October--after it sees back-to-school sales data--with perhaps a stronger hint of a rate cut in its September policy meeting statement. "Bernanke doesn't want to appear to be flinching in the face of market turmoil," Hoffman says.
Indeed, with inflation hovering near the top end of Bernanke's preferred 1 to 2 percent range, the Fed is loath to cut rates too quickly and perhaps squander its reputation as a tough inflation fighter. Yet what about an emergency cut if the crisis worsens? Fed watcher Timothy Duy, an economics professor at the University of Oregon, doubts it unless there is "considerably more financial turmoil," such as corporations being unable to issue the short-term notes known as commercial paper. St. Louis Fed President William Poole said it would take a "calamity" for the central bank to move early. So barring that, it looks as if Air Bernanke will stay grounded for the summer.
This story appears in the August 27, 2007 print edition of U.S. News & World Report.