Inflation Now Enemy Number One for Fed?
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The Fed’s two-day policy meeting tomorrow means there’s of speculation about its next interest rate move. But will rising inflation keep it from further juicing up the economy?
Since the feds last powwowed, comments made by officials suggest that policy focus seems to have shifted away from juicing up market liquidity to combating rising inflation.
Most analysts believe this marks the end of monetary easing. However, US unemployment is rising and the housing market is still in a rut. This makes it difficult for the Fed to hike rates.
The Daily Reckoning’s Bill Bonner thinks Bernanke & Co will avoid upping the interest rate for as long as possible. This should mean even higher inflation… and more investors seeking safety in gold.
Look at this: “Inflation now enemy #1 for the Fed,” says the Wall Street Journal. This sort of thinking sent the price of gold up $10 yesterday; it’s now back over the $900 level. And one of the key fellows at Schroder Investment Management told a crowd in Hong Kong that he thought gold could go to $5,000 before this run of inflation is over.
$5,000? Who knows? But, the poor saps at the WSJ are missing the point. No central bank keeps rates 2.2% below the level of consumer price inflation if it is really fighting inflation. Enemy Numero Ono? What are they thinking? Why are all the Fed’s guns facing deflation, not inflation? Sure, there’s been some blabbing about turning around…about switching sides in the war between inflation and deflation. But so far, it’s just talk.
Talk is cheap. It’s action that is dear. And the action the Fed needs to take – raising rates – will be so potentially costly for the lame U.S. economy that Bernanke and Co. are afraid to do it. They’re hoping inflation will go away so they can continue the battle against the slump, without having to worry about their unprotected flanks. Most likely, they will make a gesture towards raising rates – perhaps a quarter of a point. But then, when the mob starts howling for his head, Ben Bernanke will drop them again.
Henry Paulson has been gurgling about a strong dollar. Yesterday, he gave voice to a contradictory notion – that the Chinese should let their currency rise (and the dollar fall).
The problem for the Chinese is that they have too many dollars, furnished courtesy of the Fed, while Americans have too few. In the United States, the average household barely has enough dollars to fill its gas tank and pay its bills. But the Middle Kingdom is flooded with them.
If you don’t watch out, you’re going to drown in them, said Paulson – or words to that effect. China’s economy continues floating higher and higher. But all these extra dollars are pushing up wages and prices as well as the economy.
And then, wouldn’t you know it, Chinese export prices go up too. And pretty soon, prices are up all over the world.
Which is why the WSJ thinks it’s the top problem for the Fed too. Of course, it is a problem. But with the official CPI at 4.2% it’s not enemy number one. Maybe it’s Enemy Number Two. Most likely, it will stay there for a while longer. We still haven’t seen a big drop in commercial property…or in consumer spending. Those are probably still ahead…and will give the Fed a reason to continue blasting away at a deflationary slump. Consumer prices will continue to rise, too. Eventually, they will become so high that inflation really does become Enemy Number One.
By that time, the price of gold could be $500 higher.
Source: Inflation: Enemy Number Two
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Tags: Bill Bonner, Fed Rate Cuts, Federal Reserve, stagflation, US housing crisis, US inflation, US recessionAbout the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning and three best-selling books, Financial Reckoning Day: Surviving The Soft Depression of the 21st Century, Empire of Debt: The Rise of an Epic Financial Crisis and Mobs, Messiahs and Markets..
The Daily Reckoning offers a "uniquely refreshing" perspective on the global economy, investing and the ability to live well in uncertain times. You will learn what you can expect from today's markets and how to prosper in the face of uncertainty.