Bernanke speaks

Bernanke sends soothing message on inflation (August 22 - MarketWatch)

JACKSON HOLE, Wyo. (MarketWatch) -- Federal Reserve Chairman Ben Bernanke sent a soothing message to global markets Friday, saying inflation was on track to moderate in coming months, and triggering a rally in stocks on speculation that means the Fed will keep interest rates low for the near future.

Recent developments in commodity prices and the dollar, combined with slower growth, should lead inflation pressures to ease, Bernanke told policymakers and leading economists attending the Fed's annual retreat in Jackson Hole. The recent decline in commodity prices and the increased stability of the dollar have been welcome trends, Bernanke said.

"If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year," Bernanke said. The Fed chairman stressed that the central bank was committed to price stability over the medium term and that the Fed will have to monitor inflation carefully as the outlook remains uncertain.

First, I think it’s entirely too cute that the world’s central banks, which desperately needed the dollar to go up and commodities to fall so that they could continue to flood the world with additional liquidity, got exactly that. Markets are rarely so accommodating, and I suspect official intervention to rally the dollar. It will fail, but not before creating even worse problems than if free markets were allowed to perform their natural functions.

Note that Paul Volker killed inflation by spiking short-term interest rates. Then note that Bernanke has no such plans, as he holds interest rates in deeply negative territory but is pleased to report that he expects inflation to fall all on its own. That’s the plan? Take no action and wait for things to turn out as you expect? That’s the strategy of a central planner, not a responsible market steward.

Well, I suppose that sooner or later inflation WILL fall all on its own, but history suggests that will only happen after the money supply is severely crimped, and not as a result of a loose-money Fed chairman sticking to a politically easy policy of bailouts and handouts.

It also bears noting that the Fed has expected ‘inflation to moderate’ for ten out of the last ten monthly statements, yet the readings have gotten consistently worse month after month, hitting their worst in the most recent report.

For those who try to follow the “markets” these days (and they deserve “quote marks” because they don’t really resemble real markets anymore), using analysis and logic will find them to be maddening. The article correctly notes that the prospect of more loose money sent the stock market higher. Okay, that makes sense. But the dollar is also up strongly. That is completely backwards. The dollar ‘should’ head down on news that holders of dollars will be weakly compensated for their efforts.

These highly disjointed and increasingly violent market moves are starting to feel a bit like a car on a mountain road with loose steering…

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