Bush Signs Tax Cut and Market Falls Out of Bed

President Bush signed today the tax cut extensions recently passed by Congress. At the signing ceremony he said that

Our pro-growth policies stand in stark contrast to those in Washington who believe you grow your economy by raising taxes and centralizing power.

Meanwhile the stock market fell out of bed with the Dow declining by over 200 points to 11,205.61, down over 400 points since May 10. And the dollar has declined. And interest rates are going up.

Is this the end of the Goldilocks economy of the last three years? Or is the market testing new Fed Chairman Ben Bernanke, who has waffled about future interest rate increases.

In the United Kingdom, Anatole Kaletsky thinks the problem is that Bernanke has been too clear about his policy, reversing the deliberate obfuscation of Alan Greenspan.

He started off by emphasising, quite rightly, his strong belief in the Fed’s dual mandate: to maintain price stability and achieve the highest possible rate of economic growth. He then promised to call a halt to monetary tightening and do everything to keep the economy growing, even if inflation continued to accelerate “temporarily” in the months ahead. When currency and bond investors, whose wealth is decimated by inflation, quite predictably took umbrage and started selling their dollar holdings, Mr Bernanke quickly changed his tune and started presenting himself as an aggressive inflation-foe. He then “clarified” this apparently hawkish message by repeating that he might call a “pause” in the Fed’s rate hikes if that was what the economic statistics dictated.

Is that clear?

The truth probably is that the runup in oil prices has finally started to bite on economic growth. People at my local Arco gas station aren’t quite as eager to fill ’em up as they were back in January.

Could it be that investors are looking at future earnings and don’t think the future is quite as rosy as it was a few months ago?