Friday, February 29, 2008

I pray that Bernanke has the courage of his previous inflation convictions

so says the WSJ:

Right on cue, the best indicators of inflation expectations hit new highs. Oil has surged past the once astronomical $100 mark and is now $102 a barrel; as recently as September, it was $70. Gold is nearly $975 an ounce, and the $1,000 threshold seems inevitable. The euro has broken $1.50 for the first time, while commodity prices in general are hitting record highs. These increases will roll through the rest of the economy and lift prices for food, energy, and countless other goods and services.

Call it the Bernanke reflation, though it's more precise to call it the Fed's second inflation gamble of the decade. The first was Alan Greenspan's roll of the dice from 2003-2005, keeping interest rates too low for far too long in the aftermath of the dot-com bust. That spurred the first boom in commodity prices, as well as the subsidy for debt that led to the housing bubble and the credit mania whose collapse we are now dealing with. Mr. Bernanke was a Fed Governor during much of that time, and he seems to have learned his lessons all too well. He's now going all-in for round two.

The people who aren't being fooled by all this are the American people. They don't pay their bills with "core" dollar bills, and they know those dollars buy less with each passing month. This explains their rising economic anxiety -- and anger -- better than trade or job losses do, especially since the job market has remained relatively healthy. Inflation is the great thief of the middle class, as even Americans who don't recall the 1970s are learning. With its all-in reflation bet, the Bernanke Fed is gambling with their money.

I said this back in September:
I think the best thing for Bernanke to do here is increase the rate by 25bps. When enough time passes, I suspect more people will agree with me. Inflation still looks like the greater threat.

Until August, it was a foregone conclusion that the target rate would remain above 5%. Shows what a lot of angst in the market can do. But like this piece says, I also think that the Fed needs to look in the mirror to see the biggest contributor to this current circumstance.

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