Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
Any “accommodative” Fed policy on interest rates will tend to risk
inflation to some degree; the question is what the balance of risks
are. The trio of Plosser, Poole and Lacker, when voting fed
governors, all opposed “accommodation” in the first place, so it is
hardly surprising that those who voted against Bernanke’s policy on
rates would now be urging a quick reversal of those policies.
The real question is whether Bernanke and the other Fed governors
who have been speaking out lately on the issue of inflationary
risks, as tied to the US dollar/commodity prices issue, are also
contemplating a quick reversal of the accommodative policy
themselves. I think the answer to that question, despite the views
showing up in the bond markets, is very much a “no”.
As the Fed has done in several recent past Springs — including
just as Bernanke took over two years ago before he “paused”
Greenspan’s quarter-point rate rise march at 17 straight — I
believe it is now trying to talk up the dollar with all these
warnings about its readiness to tame the inflation beast with rate
hikes, in order to forestall a currency crash that really could
send oil up to $150 and beyond.
Talk is, after all, cheap, or at least cheaper than a real rate
increase, up to the point when the markets realize it is just
talk. The equity markets simply don’t agree with Plosser, Poole and
Lacker that the risks to the economy have receded to the
considerable degree necessary for an end to “accommodation”.
There even remains a case that the Fed needs to make a further rate
cut to get the number down to having a “1″ at the front instead of
a “2″ — Greenspan having taught us that it takes 1 % rates to
spare us a serious post dot-com-crash, post- 9/11 recession (and
who’s to say the credit crunch plus oil bubble plus housing crash
isn’t even a worse, more systemic problem for the overall economy
than Greenspan had to deal with).
My sense is that Bernanke does not want to go down in history is
the man who killed any chance McCain may have in the election by
raising interest rates on top of gas and food prices, not to
mention tipping the stock market into another autumnal crash –
something the Fed really fears because it does have very little
ammunition left to respond to a share market collapse.
We have two months of key economic data on unemployment levels and
corporate earnings forecasts and housing performance, as well as
inflation and productivity, coming before the Fed’s August meeting;
let’s just go back to Bernanke’s earlier phraseology about being
“data dependent” and leave it at that for now!
