Brooklyn's Progress
April/May 2006

BY DR. IRWIN KELLNER

No, it’s not who’s going to win the NCAA or the NIT that’s preoccupying economists these days – it’s trying to figure out how many more times the Federal Reserve will raise short-term interest rates.

No one claimed we economists are the most interesting people on the planet.

Having said this, you must be aware that what happens to short rates has a lot to do with the economy, thus with your well-being.  The outlook for corporate profits, the stock market and housing are just three examples. 

Your job might well be a fourth.

New Fed chief Ben Bernanke isn’t making things any easier.  In the true tradition of the economics profession, his speech to the Economic Club of New York recently was replete with our stock phrase, “on the one hand, on the other.”

Harry Truman must be turning over in his grave.  He was so tired of hearing this expression from his economists that he is said to have demanded that someone bring him a one-armed economist!

Notwithstanding Bernanke’s efforts to hold his monetary cards close to his chest, I conclude from the tenor of his remarks that the path of least resistance for interest rates remains up.

In other words, don’t expect the Fed to rest on its oars anytime soon.  Besides next week’s hike, which is baked in the cake, there’s another increase headed your way when the Fed meets again in early May, meaning a fed funds rate of five percent.

This would take monetary policy out of neutral and into the early stages of restrictive.  It would also put short rates well above where long-term rates stand today.

Why do I think the Fed will keep hiking?  Two reasons. 

The first is that Bernanke downplayed the significance of the recent inversion of the yield curve.  He said that while it was a good predictor of recession in the past, it may not be this time for several reasons.

That being the case, he is not likely to let an even steeper inversion of the curve stop the Fed from raising rates as much as he thinks will be necessary to keep inflation at bay.

The second reason stems from his upbeat view of the economy.  In previous speeches, he echoed the conventional wisdom that the economy is in good shape with no downturn in sight.

It stands to reason that if Bernanke is comfortable about where the economy is and where he thinks it’s going, he will not be averse to further tightening.

In the words of that great economist, Yogi Berra, this is déjà vu all over again. 

One of the reasons why we have had so many booms and busts over the years is that the Federal Reserve has tended to overdo both tightening as well as ease. 

It looks like this time will be no different.

Dr. Irwin Kellner serves as Chief Economist for North Fork Bancorporation and for MarketWatch.com, a leading interactive financial news Web site.   He also holds the Augustus B. Weller Distinguished Chair of Economics at Hofstra University, and is the author of Hofstra University’s Economic Report. Dr. Kellner is widely quoted in the print media and continues to author articles dealing with economics, business and banking. He frequently addresses the business community as well as community leaders, and appears regularly on Cablevision's News 12 Long Island, as well as on other programs in the U.S. and abroad.  For more information about North Fork Bancorporation, please visit the company’s Web site at http://www.northforkbank.com/.  This article was first published by MarketWatch on March 21, 2006.