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Bernanke Speaks, Market Falls

Federal Reserve Chair Ben Bernanke is giving a speech in South Africa this morning. His comments do not contain anything surprising.

He expects growth to be near potential, and he is still worried about inflation. The troubles in the housing market have been contained but have lasted longer than he thought.

The stock market reaction is negative. The Dow, NASDAQ, and S&P 500 are all down about 1/3% at the present. All of the sectors look red on my screen.

It is pretty clear that the Fed is not going to be cutting rates in the near term, and in fact the chances of a rate hike in the future are increasing. The weak housing market is probably the main thing that is keeping the Fed from increasing rates sooner rather than later. If the weak housing market could potentially cool inflation expectation without a rate increase, I think Chair Bernanke will allow that to play out. Clearly he does not want to send the economy into a recession.

Low interest rates have been helping the stock market for several years, and if they continue to move up, it is going to cause some problems at some point. Higher rates coupled with falling corporate profits and a weak dollar provide the basis for a correction anyway you slice it.