Bernanke: We'll raise rates when necessary (which won't be anytime soon)

Investors may be forgiven if they had deja vu all over again when Federal Reserve Chairman Ben Bernanke gave a luncheon speech at The Economic Club of Washington, D.C. on Monday. After all, the Fed chairman said pretty much the same thing three weeks ago in a luncheon speech at The Economic Club of New York. The recovery remains fragile and will be moderate at best. Unemployment will stay depressingly high. And as for inflation, well, it's nowhere to be seen.

So is a bubble-busting short-term rate hike coming sooner than expected, as Wall Street freaked out about Friday? The answer is still No, despite November's unemployment report coming in shockingly better than expected.
Recall that the Fed has only two mandates: promote stable prices and maximum employment. As long as inflation remains muted (as it is forecast to through the end of 2010) and unemployment stays painfully high (as it is also expected to through the end of next year), why would Bernanke & Co. raise rates?

They wouldn't, and Bernanke repeated as much Monday. As David Wyss, chief economist at Standard & Poor's has told DailyFinance(more than once), the Fed can't think about a rate hike until it sees sustained improvement in the employment picture. That means one fantastic jobs report, subject to revisions of anywhere from 30% to 60% in either direction, is hardly enough data to make a call.

Dennis Gartman, author of the well-regarded investment letter bearing his name, reminded clients of this state of affairs, too. "One month of falling unemployment is to be applauded of course, but in all likelihood we shall need to see two or three or even four such decreases in unemployment in a row before the authorities shall move to tighten," Gartman wrote Monday.

Last but hardly least, fidgety traders seemed to realize that their cheap-dollar-fueled bubbles remain safe for now. A few words from the Fed chairman was all it took to get the dollar falling again. It seems the reflation trade lives, at least for another day.
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