two more rises to come DAVID CALLAWAYFed's sweet sixteen not...

two more rises to come DAVID CALLAWAY

Fed's sweet sixteen not enough
Commentary: Forget pause; look for two more in summer
By David Callaway, MarketWatch
Last Update: 12:03 AM ET May 11, 2006


SAN FRANCISCO (MarketWatch) -- Anyone who thinks Fed Chairman Ben "c ocktail chatter" Bernanke is going to let the market off the hook by halting -- or even pausing -- the central bank's two-year campaign to raise interest rates next month is way too focused on what the definition of the word "yet" is.
The tiny word, at least 11 letters smaller than the shortest utterance to ever come out of Alan Greenspan's mouth, captivated interest rate watchers on Wednesday after the Federal Reserve inserted it into the minutes of its latest policy meeting.
Excited Fed watchers -- a bizarre hobby that falls somewhere between butterfly chasing and ghost busting -- worked themselves into a speculative spook over whether the word "yet" was a signal to the markets that the Fed might pause in its campaign in June after 16 straight rate hikes. While last time the Fed said it that further policy firming, or rate rising, "may be needed," this time is said it "may yet be needed."
Talk about obsessive. It's true there may be several hundred billion dollars riding on what the Fed does next. But to think that these Fed governors would be playing word games with the markets at a time when they are so dangerously overheated is to be in the land of the truly self-absorbed. Even Barry Bonds hits a golf ball once in awhile.
With the federal funds rate now at 5% after this latest hike, some economists argue that this increased cost of borrowing will be more than enough to slow the economy down as it takes effect over the next 12 or 18 months, citing an already slowing housing market as an example of the air leaving the balloon.
But that speculative fever in housing has simply shifted to other markets, like gold, silver, oil, and other commodities. Those markets showed no signs of pausing after the latest rake hike. It's likely the Dow Jones Industrial Average ($INDUDow Jones Industrial Average
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$INDU ) will hit its all-time high either later this week or next. That needs to happen before we even think of worrying about a coming collapse in equities markets. And commodities prices aren't going anywhere as long as Iran and its prolific president keep stirring the Middle East pot. As one long-time reader put it to me this week, these sharp rallies in oil and gold this year seem a lot more like a rush to safe havens from war than from inflation.
As for Bernanke, it may not be true he's ready to sing the Fed secret fight song for a gin and tonic, as some Fed watchers wondered after TV anchor Maria Bartiromo burned him by reporting his comments to her at a Washington press gala two weeks ago.
But he does know that the seat under him is getting hotter by the day, and that his first decision as Fed chief to change course on interest rates will be judged by the markets with all the intensity of the baseball world on a Bonds fly ball to right field this week.
To go soft on his first call and pause by doing nothing in June, then starting to raise rates again in August, is to become a slave to the numbers. Monetary policy, for all its high-brow economic claptrap, is an art, not a science. No one demonstrated that better than Maestro Greenspan.
Bernanke will raise rates two more times, in June and August, to 5.5% from today's 5%, and then stop completely for this cycle. The stock market needs it; the bond market needs it; and as far as the Fed is concerned, the economy still needs it.
The question is whether investors can stomach the suspense.