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…