June 10, 2006
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When Bernanke speaks, the markets freak
FED CHIEF CLEARER THAN PREDECESSOR; INVESTORS DON’T SEEM TO LIKE IT
By Kevin G. Hall
Knight Ridder
WASHINGTON – In his fifth month on the job, Federal Reserve Chairman Ben Bernanke is learning the hard way that his pledge to make U.S. monetary policy clearer comes with a price.
Bernanke became chairman Feb. 1, and he’s off to a rocky start after roiling the markets in recent weeks. His sin, it seems, is speaking too clearly about interest rates and inflation, as he promised to do after taking the helm from the opaque Alan Greenspan, who turned vague statements into an art form.
Comments Monday by Bernanke sent the markets plunging most of the week. The technology-heavy Nasdaq composite index fell for six days in a row, finishing the week 3.8 percent lower at 2,135.06. The blue-chip Dow Jones industrial average — which includes Silicon Valley tech heavyweights Intel and Hewlett-Packard — slid 3.2 percent to 10,891.92.
The new chairman’s rough patch began April 27, when he signaled before the Joint Economic Committee of Congress that after 16 consecutive interest-rate increases since June 2004, a pause might be in order. Stocks rallied.
Days later, however, in what he thought was a private conversation with a CNBC reporter, Bernanke said the markets had misunderstood his message and that a pause was in no way certain. CNBC reported it May 1, sparking a Wall Street roller-coaster ride.
Soon after, data came out suggesting that energy prices were driving inflation to the upper limits of the Fed’s comfort zone. The implication: A late June rate increase was now more likely than a pause.
Bernanke’s words in April had proved too optimistic, given that the Fed’s main mission is to quell inflation, primarily by setting short-term interest rates.
Testifying before the Senate in late May, Bernanke apologized for “a lapse in judgment on my part” in talking loosely to a reporter. In the future, Bernanke said, he’d stick to formal channels to communicate to the public.
But even speaking that way roiled the markets. In a speech to a conference Monday in Washington, Bernanke left little doubt that future rate increases should be expected because price inflation had reached a danger zone.
The Fed chief also said the U.S. economy is showing signs of slowing down. He pointed to slowing consumer spending, the cooling housing market and slower job growth. A slowing economy normally prompts an end to rate increases or spurs rate cuts to rekindle economic embers. But Bernanke left no doubt that he’s more worried about rising inflation than slowing growth — and their combination is troubling.
“These are unwelcome developments,” he said.
The Dow Jones industrials promptly plunged 200 points, and stocks slumped further through the week. What the markets heard was that rate increases might extend beyond the next expected bump up to 5.25 percent at the Fed’s June 28 and 29 meeting.
Why such volatility? Bernanke, after all, was just engaging in the “plain speak” he’d promised.
Blame Greenspan, who for more than 18 years as Fed chairman developed an oft-impenetrable language to communicate the Fed’s thinking.
“I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said,” Greenspan once famously quipped.
The markets, it appears, don’t want straight talk.
“The markets and Bernanke haven’t quite learned how to listen to each other,” said James Glassman, a senior economist for investment bank JPMorgan Chase. “I’m sure he thinks he’s leaving the door open . . . but the market needs simple messages, and the markets have sort of been used to getting spoon-fed.”
The danger in Bernanke’s plain talk is that it creates expectations that can be dashed by new contradictory data. When he said future Fed rate decisions would be dependent on emerging data but looked favorable for a pause, he didn’t leave the Fed much wiggle room for unexpected data — as the next set of inflation numbers promptly proved.
“The problem here is that Bernanke came in when the easy work was over,” said Laurence Meyer, a Fed governor from 1996 to 2002. “Bernanke was not able to give the kind of more precise guidance” that comes earlier in a rate-raising cycle, Meyer said.
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New Treasury chief is seen as insurance against crisis
ANALYSTS ASK WHY PAULSON ACCEPTED POST
By Kevin G. Hall
Knight Ridder
WASHINGTON – When President Bush nominated Wall Street titan Henry Paulson last week to be his next Treasury secretary, there was universal praise for the rock star of investment banking.
This week, as Paulson met with leaders on Capitol Hill, analysts are pondering why he accepted a post that critics say Bush has rendered impotent.
Traditionally, a Treasury secretary’s powers touch on nearly everything important to the U.S. and global economies, from trade, debt and taxes to Social Security and the minting of money. Men who have held the job in decades past seemed larger than life and kept a firm hand on the tiller of national economic policy.
President Reagan had James Baker III, whose 1985 Plaza Accord coordinated global currency values and trimmed a mammoth U.S. trade deficit. President Clinton leaned heavily on Robert Rubin, who like Paulson once headed investment bank Goldman Sachs and like Baker took the lead in averting global financial crises, his from Mexico, Asia and Russia.
Bush’s two terms, to date, have been markedly different. His first two Treasury secretaries were men firmly rooted in the old economy, wary of Wall Street and unbridled financial markets. Paul O’Neill headed aluminum giant Alcoa and the departing John Snow ran railroad power CSX. They took on the cheerleader role usually reserved for the commerce secretary, while the White House set economic policy and managed day-to-day decisions.
“I don’t remember ever seeing that happen before. The White House played a role, but I don’t think you would ever find a period where day-to-day” decisions were made by the White House, said Barry Bosworth, a senior fellow at the Brookings Institution, a center-left research center.
Bosworth served President Carter as the director of the Council on Wage and Price Stability.
Paulson met Friday with Senate Majority Leader Bill Frist, R.-Tenn., who said he expects Bush’s choice to win Senate confirmation by July 4.
Donald Evans, Bush’s commerce secretary from 2001 to 2005 who reportedly was on the president’s short list of potential Treasury candidates, thinks Paulson sees a chance to be the spokesman for addressing the longer-term liabilities that jeopardize the nation’s financial future.
“I think Hank, as well as anybody in the world, does have a real-time understanding of the state of the economy. . . . He has a very real-time understanding of what the real challenges are and what the real dangers are to the economy as we look into the future,” said Evans, now president of the Financial Services Forum, a trade association for the financial sector. “He can articulate those issues with a tremendous amount of credibility.”
Sen. Charles Grassley, R-Iowa, agreed.
“I believe he was selected to be more of a spokesman,” said Grassley, chairman of the influential Senate Finance Committee, which must approve Paulson’s nomination.
As Bush’s administration nears lame-duck status, few expect the president to push for any significant economic-policy changes. Paulson’s credibility in global financial circles then becomes the political equivalent of a rainy day fund, something of great value should the stock market drop precipitously or some financial crisis emerges on a global scale.
“If there were a crisis, he’s very well suited to take the leadership and make the adjustments,” Bosworth said.
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Stocks fall again in market’s worst week of the year so far
FOR WEEK, NASDAQ SHEDS 3.8%, DOW 3.2%, S&P 500 2.8%
Mercury News Wire Services
Wall Street finished its worst week of the year with a moderate decline Friday as persistent unease over inflation and interest rates kept investors nervous about buying.
The technology-heavy Nasdaq composite index lost 10.26, or 0.5 percent, to 2,135.06.
Silicon Valley’s largest tech stocks by market value were mostly lower. Cisco Systems, Intel and Gilead Sciences were up. Google, Hewlett-Packard, Oracle, Apple Computer, eBay, Yahoo and Applied Materials were down.
The Dow Jones industrial average slid 46.90, or 0.4 percent, to 10,891.92. The Standard & Poor’s 500 index fell 5.63, or 0.4 percent, to 1,252.30.
For the week, the Nasdaq plunged 3.8 percent, the Dow dropped 3.2 percent, and the S&P 500 sank 2.8 percent.
Next week’s reports on wholesale and consumer prices will provide the latest clues on the economy’s health and could spark more investor debate on the battle between economic growth and inflation, and whether the Federal Reserve will continue raising short-term interest rates.
“People will be thinking about what the Fed will be debating at their June 28-29 meeting,” said Jack Caffrey, equities strategist for JPMorgan Private Bank. “Investors are scared not necessarily about what the Fed will say, but of the possibility that the Fed may overtighten rates.”
In corporate news, Dallas chip maker Texas Instruments raised its earnings and revenue targets for the second quarter, but attributed the gains to a legal settlement and a tax break. Texas Instruments dropped $1.04, or 3.4 percent, to $29.68.
Prudential Equity Group gave further good news to the semiconductor sector with an upgrade to “favorable” from “unfavorable.” Prudential said inventories are at all-time March-quarter lows in a number of places in the supply chain. “We view lean inventories at these critical areas as a positive for the semiconductor sector,” the brokerage said.
Santa Clara chip giant Intel was up 5 cents, or 0.3 percent, to $17.16.
Genelabs Technologies rose 11 cents, or 5.9 percent, to $1.98. The Redwood City drug developer said it expects a mid-year cash level of about $15 million. The company also said it received $12.5 million in up-front payments from Novartis.
Take-Two Interactive Software fell $2.94, or 17.5 percent, to $13.83. The video-game publisher, which sells titles including “Grand Theft Auto: San Andreas,” reported a wider-than-expected quarterly loss despite a 20 percent jump in sales.
Bond prices drifted, with the yield on the 10-year Treasury note, which moves in the opposite direction, slipping to 4.98 percent from 5.01 percent late Thursday. Short-term yields continued lingering above long-term rates, signaling greater expectations of slowing economic growth.
Elsewhere, the U.S. dollar dipped against the Japanese yen and was flat compared with European currencies, while gold prices stood near $610 an ounce.
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U.S. trade deficit up to $63.4B in April
MARTIN CRUTSINGER
Associated Press
WASHINGTON – The trade deficit is rising again after two months of declines, pushed by oil prices and a flood of imports from China. Analysts warned that global oil prices above $70 per barrel will swell the deficit more in coming months.
The Commerce Department reported Friday that the gap between what the United States sells abroad and what it imports rose to $63.4 billion in April, 2.5 percent higher than the March imbalance of $61.9 billion.
The trade deficit fell in both February and March after hitting an all-time high of $66.2 billion in January.
While economists noted that the April deficit was smaller than the $65 billion that had been expected, it was still the sixth largest imbalance on record. They said deficits in comings months were likely to be worse given the jump in global crude oil prices.
On Wall Street, stocks finished their worst week of the year as investors remained nervous over worries about inflation and interest rates. The Dow Jones industrial average fell 46.90 points Friday to close at 10,891.92, ending the week with a loss of more than 355 points.
Investors’ worries about inflation increased after the Labor Department reported that prices for imported goods jumped 1.6 percent in May. Excluding the big rise in petroleum products, import prices were still up 0.6 percent last month.
The April deterioration in the trade deficit came from a $1.44 billion increase in America’s foreign oil bill, which rose to $23.8 billion. That reflected a big jump in crude oil prices which overwhelmed a drop in volume. Oil traded on Friday at $71.45 per barrel in New York, up $1.10 from the previous day. Oil hit an all-time high of $75.17 in late April.
Through the first four months of this year, the trade deficit is running 12.9 percent above the same period a year go, putting the country on track to run up a record trade deficit for a fifth straight year. Last year’s deficit was $716.7 billion.
Critics of the administration’s trade policies seized on the new imbalance as further evidence that President Bush’s strategy of striking free-trade deals with countries around the world was not working and was contributing to a loss of nearly 3 million manufacturing jobs since Bush took office.
“These figures are a jarring reminder that our nation needs a new approach to its trade policy,” said Rep. Benjamin Cardin of Maryland, the top Democrat on the Ways and Means trade subcommittee.
Sen. Byron Dorgan, D-N.D., said that the new deficit figure highlighted the “total failure of U.S. trade policy” and showed that the country was handing over $2 billion a day to foreigners to cover the trade gap.
But new U.S. Trade Representative Susan Schwab said the country’s trade picture was “much less dire” than critics were contending. She noted that the overall economy is performing strongly at present with unemployment dropping to 4.6 percent in May, the lowest jobless rate in nearly five years.
The increase in the April trade deficit reflected a 0.7 percent rise in imports, which climbed to $179.1 billion, the second highest level on record.
In addition to a higher oil bill, imports of autos and auto parts were up and shipments of consumer goods from China of such items as furniture, televisions, video recorders and toys all rose.
That helped to push America’s total deficit with China to $17 billion in April, up a hefty 9.4 percent from March. That was likely to add to pressure in Congress to force China to revalue its currency as a way of helping narrow the deficit.
American manufacturers contend China’s currency is undervalued by as much as 40 percent, making Chinese goods cheaper for U.S. consumers and American products more expensive in China.
Some analysts said that Treasury Secretary nominee Henry Paulson will likely face tough questioning on the administration’s approach to China during his upcoming Senate confirmation hearings.
U.S. exports of goods and services slipped 0.2 percent to $115.7 billion, just slightly below the all-time high set in October, reflecting a big $310 million drop in commercial aircraft shipments and smaller declines in sales of farm products and consumer goods.
The deficit from last year was revised down from an earlier estimate of $723.6 billion, reflecting annual benchmark revisions that increased America’s surplus in services based on more complete data.
Analysts believe the deficit will set another record this year, although they also think the pace of deterioration is slowing after huge increases in recent years.
The deficit with Japan rose by 2.8 percent in April to $7.8 billion. The deficit with Canada rose by 16.3 percent to $6.1 billion in April while the imbalance with Mexico fell by 9.3 percent to $4.9 billion.
America’s deficit with the 25-nation European Union declined by 7.2 percent in April to $9.4 billion.
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Greenspan: Dependence on oil threat to economy
By Kevin G. Hall
Knight Ridder
WASHINGTON – Rising energy prices are pushing up inflation and increasingly threatening the U.S. economy, former Federal Reserve Chairman Alan Greenspan testified Wednesday.
He called for speedily developing alternative energy sources such as ethanol and liquefied natural gas.
In his first appearance on Capitol Hill since he ended his nearly 19-year Fed tenure Jan. 31, Greenspan told the Senate Foreign Relations Committee that the United States had better reduce its dependence on foreign oil or suffer damaging economic consequences.
A recent terrorist attack on Saudi Arabia’s main oil refinery, though thwarted, should serve as a warning that a successful hit on an oil installation could spark a global price shock that would create “a significant contraction in the economy,” Greenspan said.
While the U.S. and global economies have shown surprising resiliency to rising oil and natural-gas prices since 2002, Greenspan said “recent data indicate we may finally be experiencing some impact.”
The former Fed chief also detailed how investors, rather than users of oil, have come to set the price of oil through purchasing futures contracts. These speculators are betting that oil will cost above $60 a barrel six or seven years out, he said, suggesting that there won’t be a significant retreat for oil prices in coming years.
But he said “current oil prices over time should lower to some extent our worrisome dependence on petroleum,” with the development of alternative fuels and broader use of electric-hybrid cars. This “would help to wean us off our petroleum dependence,” Greenspan said.
Greenspan noted that three-quarters of the world’s oil reserves are state-owned. The run-up in prices is resulting in huge amounts of cash “to countries that are not friends of ours,” he said. This “is a very serious issue.”
The bulk of his nearly three-hour testimony focused on reducing oil dependence and boosting energy security.
Greenspan said repeatedly that cellulosic ethanol, a next-generation alternative fuel that could be made from nearly any plant fiber, appeared to be the most promising solution to the country’s oil addiction.
“I’d move as quickly as I could to find out whether cellulosic is a practical alternative,” he said.
He said conventional corn-based ethanol holds little promise to reduce U.S. oil dependence significantly. If every bushel of corn grown in the United States went to producing ethanol, it would displace only about 10 percent of projected U.S. gasoline consumption, he said.
To make cellulosic ethanol, scientists deploy mass-produced, biologically engineered enzymes that can break down virtually any plant stock for fermentation and conversion into ethanol. Among its benefits is that, unlike gasoline or conventional ethanol, its production doesn’t produce gases that contribute to global warming.
Pressed repeatedly, Greenspan frowned on the idea of a federal “man-to-the-moon”-type project to create alternative fuels. As a political conservative and market-oriented economist, Greenspan typically prefers private-sector to governmental solutions.
Greenspan also touted liquefied natural gas as an important tool in reducing dependence on oil and gasoline.
For years, he’d lamented the lack of liquefied natural-gas terminals in the United States. He complained Wednesday that Japan and other countries had locked up supplies in long-term contracts.
“This could be another source of replacement for petroleum,” he said.
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