Page 2 of 2 Bernanke's words strike false note
By Julian Delasantellis
energy and other commodity prices have increased, and some indicators of
inflation expectations have risen in recent months. ... Still, uncertainty
about the inflation outlook remains high. It will be necessary to continue to
monitor inflation developments carefully."
The common term for when the Federal Reserve intervenes in the money markets,
through purchases or sales of short term Treasury securities, is open market
operations. Here, with the Fed's hands tied, unable to either raise rates to
fight inflation, fearing that would push the economy further into recession, or
lower rates, fearing that would stoke more commodity inflation, is the
Fed�s new, perhaps final tool - what is sometimes called "open mouth
operations".
As if the inflation problem was a stubborn child, the Fed now
apparently thinks that it can change its behavior, that it can calm the
inflationary expectations reflected in rising prices for "back month" commodity
futures contracts to be settled well into the next decade, by simply raising
its voice, by finding words and language that convinces the markets that the
Fed is serious about actually doing something inflation without actually doing
something about inflation.
It didn't take long for the markets to see through the subterfuge. The US
dollar rose in the initial minutes after the release of what seemed to be a
strong anti-inflation statement, then pulled back sharply, falling to two week
lows against the euro; foreign exchange traders realized that the statement was
more a substitute for an anti-inflation policy than an actual anti-inflation
policy.
US stocks also quickly realized the game being played on them; the Dow Jones
Industrial Average quickly tacked on 70 points in the immediate aftermath of
the statement, only to lose all of the rally and more, closing up a mere four
points on the day. A recent newsletter to clients of the Royal Bank of Scotland
warned of the inflation threat possibly causing a 25% crash in world equity
markets by September; on the bright side, such an event would probably at last
divert the American electronic media's now traditional manic obsession with
summer shark attacks.
From Bernanke's viewpoint, one positive effect the Fed's non-decision decision
had must have been to depopulate the Texas insurgency now being led by Dallas
Federal Reserve Bank president Richard Fisher against what he sees as
Bernanke's inadequate vigilance against inflation.
In front of every microphone he can find outside a karaoke bar, Fisher has
recently been raising the alarm against the inflation threat. At the April
meeting, Fisher, along with Philadelphia Fed president Charles Plosser,
dissented from Bernanke's rate-cutting majority; they wanted a rate hike along
with much stronger anti-inflation language. Fisher, still wanting a rate hike,
once again dissented from the current decision, but apparently the stronger
anti-inflation language coaxed Plosser back to Bernanke - he voted with the
majority.
At the end of the day, what all this represents is yet another Bernanke gamble,
a frantic attempt to buy some time until the circumstance arises where
inflation and unemployment do not have to be fought simultaneously. The hope
here is that, by the time of the next Fed meeting on August 6, either inflation
will have abated, allowing an attack on the recession with another rate cut, or
a strengthening economy will make a rate hike more palatable. If, however, both
unemployment and inflation continue to rise in unison, the gamble will be lost,
for that will mean that stagflation has been given a further six weeks to
implant its toxic roots ever deeper into the economy.
Whatever happens next, it is probably fair to assume that this is a trick that
Bernanke can't get away with much more, if at all. If inflation continues to be
seen as a threat, then simply employing ever harsher and harsher language
eventually won�t work. Sooner or later, and if the post-meeting reaction
by the markets is any indication, it�s probably sooner, the markets are
going to call Bernanke's bluff.
If inflation is still seen as a problem in August, and if then Bernanke is seen
as a dithering, indecisive Hamlet ("to raise or not to raise - that is the
question") expect a truly awesome forthcoming fall in the US dollar - along
with a burgeoning of the Fisher-led insurgency that might well threaten the
continued tenure of Bernanke as Fed chairman.
Of course, the process of reconciling the current American economic
difficulties will be easier once American economic policymakers, Bernanke
included, finally realize that the nation�s economic destiny is no
longer wholly determined by personages and events within its borders.
As I stated
last week, the current inflation in the United States, as well as in most of
the Western industrialized democracies, cannot be addressed solely
domestically, for its origin is not at home but in the commodity demand of such
newly industrializing nations such as Brazil, India, and, especially, China.
Should the US raise domestic interest rates while ignoring the real engine
churning price hikes from out of these nations, the most likely practical
effect would be not an amelioration of inflation but a deepening of the
domestic fiscal and credit crisis. Mohamed El-Erian, the former superstar
manager of the Harvard University endowment fund now advising the Pimco bond
brokerage, recently said that he does not consider even Goldman Sachs, American
finance capitalism's golden goddess, to be immune from possible damage arising
out of the credit crisis. If you have a virus so potent that it fells even the ubermensch,
you can imagine what it will do to the population as a whole.
"You think", the Bee Gees sang, "that I don't even mean a single word I say?"
Precisely. The markets don't think that Bernanke means a single word he says.
Besides having "words", back then the Bee Gees were devastatingly handsome;
undoubtedly, that assisted in, as the song said, taking the girls they fancied
hearts away. Bernanke's not that good looking; next time, he'll need to come
through with actual actions.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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