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Fasten your seat belts
Commentary: Fed soon could raise rates as aggressively as it has cut them
By Mark Hulbert, MarketWatch
Last update: 12:01 a.m. EDT March 21, 2008

ANNANDALE, Va. (MarketWatch) -- The last time I chatted with Dan Seiver was immediately following the Federal Reserve's interest-rate cut on Jan. 30.
(Read Jan. 30 column.)
Seiver edits a newsletter that I track called the PAD System Report, which has a decent long-term track record. In his spare time after producing his newsletter, Seiver finds time to be an emeritus professor of economics at Miami University of Ohio and a visiting professor of economics and finance at San Diego State University.
I decided to check in with Seiver after this week's rate cut, not only to get his thoughts about what the Fed is likely to do next but also to chide him for predicting in late January that the Fed would only cut rates an additional half point and then be done altogether with its rate-cutting.
As fate would have it, of course, the Fed earlier this week cut rates by three-quarters of a percent, and it is not at all clear that the Fed won't cut even more in coming weeks and months.
In his defense, Seiver explained that he didn't foresee the insolvency and potential bankruptcy of Bear Stearns Cos. (BSC:







5.96, +0.63, +11.8%) . And, for this reason, he said he should probably qualify his prediction that the Fed will not cut rates any further.
"If there's another Bear Stearns lurking in the background," he said, then all bets are off: In that event, "the Fed will probably slam the gas pedal down again."
Notwithstanding that qualification, though, he said "I don't think the Fed will cut any more."
Seiver has one more reason now than in late January for believing the Fed is done with its rate cutting: There is growing dissension among members of the Fed's Open Market Committee (FOMC) about the wisdom of cutting rates. "The FOMC has to speak with close to one voice," he said, if the Fed is to not spook investors and do more damage than good. "The market would take it very badly if there were a lot of dissenters."
In voting earlier this week to cut rates by three-quarters of one percent, of course, the FOMC already faced dissension, with two members voting against doing so. "Two dissents are a serious problem," Seiver believes. "My guess is that there would have been other dissenters if the Fed had tried to cut a full point," which is what the Fed futures market was otherwise expecting prior to the Fed meeting.
And Seiver guesses that there will be even more dissension if the Fed, absent another Bear Stearns-like crisis, tries to cut rates any further.
This issue of internal Fed dissension comes on top of the reasons that Seiver mentioned in late January for thinking that the Fed was close to ending its rate-cutting: The significant and growing threat posed by inflation, and the even bigger worry that the Fed could soon find itself so behind the curve in responding to financial crises that it becomes "180 degrees out of phase" with what's really going on in the economy.
Seiver is confident that Fed chairman Ben Bernanke is well aware of the risks involved with the Fed falling too behind the curve. That is why, Seiver believes, Bernanke is likely, once he starts to raise rates to counter the inflationary threat, he "will raise rates just as aggressively" as he has recently cut them.
When it becomes clear that the economy is going to recover from its current period of weakness; "the Fed will take back [the rate cuts], and will take them back fast."
The bottom line from Seiver's point of view? Get ready for a whole lot of volatility.

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