The Fed has lost all credibility in the markets. On Wednesday, Ben Bernanke was unable to put his money where his mouth is. Earlier, he jawboned on inflation, trying to match the BoE and the ECB in rhetoric, but his actions speak louder than words. He did not raise rates as I predicted.
On Thursday, the market was down, marking the worst June since the Great Depression. In my view, this is a direct result of Bernanke’s loose monetary policy as U.S. base interest rates are at 2% while inflation is running at 4%. This is like paying banks 2% to borrow from the Fed.
The result has been inflation in commodities, particularly in food and energy, and market turbulence. We saw the reaction to Bernanke’s dovish actions in the market moves yesterday: oil up, gold up, markets down, and dollar down. While Bernanke thinks he is helping the banking industry, he is only delaying the inevitable and making the unwind process that much more difficult and protracted. Loose money is what got us into this mess, not what will get us out.
It will be very compelling to see the ECB raise rates in contrast. If they do raise rates, expect the dollar to fall further. This will be bad news for the U.S. economy.
Related posts
What is Inflation?
Related articles
Fed Should Run Policy, Outsource Communications: Caroline Baum, Bloomberg News, 27 Jun 2008
For Caroline Baum’s column, see my blogroll on the sidebar.
Other posts on Caroline Baum
Why Real Estate Market Is Nowhere Near a Bottom: Caroline Baum
Is the Fed going to raise rates?
Caroline Baum: Dollar Policy for Dummies
Caroline Baum: Greenspan, `Master of Garblements’
The Fed is on the easy money trip
News Round-Up: 05 May 2008