Former Obama Adviser Bernstein: Beware Good News

Friday, 05 Apr 2013 01:06 PM

By Michael Kling

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Don't worry about bad news. It's the good news that stock investors should really worry about.

A good economic report, especially a better-than-expected report, may prompt markets to believe the Federal Reserve is about to let interest rates rise, Jared Bernstein, a former Obama administration economist, wrote in a guest blog for the Huffington Post.

And that shift in expectations could prompt a market sell off.

Editor's Note:
Economist Warns: 50% Unemployment, 100% Inflation Possible

The real danger, he warned, is not surprisingly good news itself, but rather the market's reaction — or over-reaction. "So I'd watch very carefully for upside surprises, or more precisely, market over-reactions to upside surprises."

The Fed itself has strived to be clear about its actions, Bernstein pointed out, saying the Fed will wind down its quantitative easing program slowly and carefully and with transparency.

"If Bernanke and Co. were crazy enough to surprise everyone by suddenly raising rates or pulling back on quantitative easing, equity markets would tank big time. But they — the Fed — won't do that."

To keep rates low, the Fed is purchasing $85 billion of Treasuries and mortgage securities a month in its ongoing quantitative easing program.

The Fed has said it will keep interest rates low until unemployment falls to 6.5 percent or inflation increases to 2.5 percent. Unemployment is now at 7.6 percent and inflation remains contained at about 2 percent.

Dennis Lockhart, president of the Atlanta Fed, said the Fed might scale back its bond buying before the end of the year if the economy continues to improve, Reuters reported. The economy will grow over 2 percent this year and could be stronger.

Federal budget cuts pose an economic risk in the near-term, and although unemployment has decreased, the labor market is far from full recovery, Lockhart said, according to Reuters.

"Conditions in the broad labor market are quite mixed," he said.

While critics say the Fed's quantitative easing program will lead to inflation in the future, Lockhart noted that inflation as well as inflation expectations remain contained.

The U.S. economy added just 88,000 jobs in March, the fewest in nine months, according to the Labor Department. The unemployment rate dipped to 7.6 percent, the lowest in four years, from 7.7 percent.

However, the unemployment rate only fell because more people stopped looking for work, according to Reuters.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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