Kudlow to Moneynews: 'I Don't Want to See the Fed Get Aggressive'

Thursday, 27 Jun 2013 06:26 PM

By Dan Weil and David Nelson

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The Federal Reserve should leave its current accommodative policy in place rather than prepare to taper its quantitative easing (QE), says Larry Kudlow, host of CNBC's "The Kudlow Report" and a Moneynews Insider.

He thinks Fed Chairman Ben Bernanke's remarks last Wednesday that the central bank may curb its QE later this year were ill-advised.

"One of the things I’m watching here, beside the volatility in the stock market, is the price of gold, which is plunging," Kudlow said in an exclusive interview with Newsmax TV.

Watch our exclusive video. Story continues below.



Editor’s Note: Put the World’s Top Financial Minds to Work for You

Gold prices have dropped about 12 percent since last Tuesday, the day before Bernanke's comments. Spot gold stood at $1,204 an ounce Thursday afternoon

"At this point, the gold price is a deflationary signal, and part of that is reflected by the fears that the Fed is going to go too far, stop buying bonds and QE all together, which means a slowdown in the money supply," Kudlow says.

"I don’t think that’s either wise or necessary at this point." His reasoning: the economy isn't "particularly strong," Kudlow says. GDP grew only 1.8 percent in the first quarter.

"I’m not worried about inflation at all, that’s really the message of the gold price," he says. Given that interest rates have soared too, "I wish the Fed would just stay where it is for a while. I don’t see any rush in them taking action."

In a wide-ranging interview, Kudlow also said:

• "We’re, certainly, going to have an intermediate[-term] bear market in bonds."

If the Fed ends its QE in the next 12 months, interest rates will head higher, Kudlow says. "As a rough approximation, you’re looking at a 3.5 percent 10-year Treasury yield. . . . Maybe it could go to 4 percent." The 10-year yield stood at 2.48 percent Thursday.

That rate increase "could have a negative impact on the economy," Kudlow says. "So that’s another reason why I really don't want to see the Fed get aggressive here."

To be sure, with inflation so low, bonds won't crash, he says.

• The stock market will remain under pressure too.

"Corporate profits are a little slower right now, so that probably doesn’t bode all that well for the stock market if the Fed goes through this tapering exercise," Kudlow says. But he's not extremely negative on stocks either.

"I don’t want to get too bearish," Kudlow says. "All I'm saying is stocks and bonds are correcting. The Fed is probably an important factor behind that correction. I would be very wary as an investor."

Kudlow would love to see the Standard & Poor's 500 lock in the 14 percent gain it has achieved so far this year.

But, "again, if the Fed goes through any sort of tightening, and tapering is tightening in money supply terms, it's going to damage stocks," he says. "The economy is not in a recession, but it is not a strong economy."

• Corporate profit growth is slowing

"Profits are the mother's milk of stocks," Kudlow says. And the outlook for annual profit growth has slowed to 5-6 percent. Combined with higher interest rates, "that's going to hurt stock valuations," he says.

But there is some good news on the earnings front, Kudlow maintains. Companies have been very clever in increasing productivity and cutting costs, he says.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

"The question is how clever can these companies be? I can't answer that question but I'm pretty confident because . . . the reason we have any growth at all is the resilience and cleverness of American businesses."

It's certainly not thanks to government, Kudlow says. "Government has basically been an obstacle to the economy."

See these other exclusive excerpts from the Newsmax TV interview:


• Kudlow to Moneynews: 'I Would Be Very Wary as an Investor'

• Kudlow to Moneynews: 'Government Has Been Obstacle to Economy'


• Kudlow: GOP Must Become 'Welcoming Party' to Immigrants


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