FRIDAY FEBRUARY 12, 2010

Tightening without Tightening

Can the Federal Reserve tighten monetary policy without raising interest rates?  That appears to be what is happening as recent events around the world have provided the Fed with the flexibility to leave rates lower than they might have.

The Greece debt situation has created uncertainty in Euroland.  The EU has been very careful not to state that they will rescue Greece.  They must be careful because if Greece is bailed out, investors believe that Portugal, Spain and Italy won't be far behind.  This will create an awful monetary environment for the Euro.  Acting on this fear, currency traders are selling the Euro and buying virtually any other currency, including the dollar.  If the dollar continued to weaken, at some point, the Fed would have had to raise rates to defend it.  This new found strength in the dollar provides the Fed with the flexibility to leave rates lower for longer than they might have if the dollar remained weak.

In the short term, prolonged low rates will help the U.S. economic recovery and support the stock market.  However, in the long run, it is difficult to get excited about having the nicest house on a bad block.  The fact that Greece et. al are having their problems does not solve the structural issues facing the U.S. economy.  Our deficits, both on the state (CA, NY, NJ, IL, MI) and federal level, won't go away because Greece is in trouble.  But the recent events in Euroland does give the Fed, and the U.S. economy, are little breathing room.

POSTED AT 1899-12-30 08:24:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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