A Strange Resemblance

Any resemblance between Ben Bernanke and Billy Joel was never apparent until this cartoon in The Economist was spotted. More likely there is no resemblance at all between the two, however, if this week's inflation numbers come in hot again, Ben's eyes may bulge at least a little, and then it will be more clear.

Let's hope that there are no similarities between Billy Joel's driving ability and Ben Bernanke's steering of the economy - that could spell real trouble.

Now that weekly delivery is once again back on a Friday or Saturday schedule, rather than the too-late-to-matter Monday arrival, there's almost always something interesting to talk about on Monday. And new words to learn too. Some time ago, it was learned that "punters" are "gamblers", in this story ($) it's not quite clear what to make of "Missing a wingbeat", a reference to dissenting board member Jeffrey Lacker.

Missing a wingbeat

JEFFREY LACKER has held a vote on the rate-setting committee of America's Federal Reserve for less than a year. But on August 8th he did something no committee member has done since June 2003: he voted against the chairman, Ben Bernanke. Mr Lacker, head of the Richmond Fed, thought his fellow central bankers should raise interest rates for the 18th time in a row. Instead, they decided to pause in their long migration back to a temperate monetary policy, holding the federal funds rate at 5.25%.



This split decision was accompanied by a statement that might most charitably be described as “deliberative”. The Fed admitted core inflation was high (2.4% in the year to June, according to its preferred measure); it probably won't remain so, but if it does the Fed will start tightening again, falling in behind the man from Richmond.

The Fed is of course now concerned about rising labor costs, as recent reports have shown them to be moving up. Not much, unfortunately for most Americans - they are only rising at about the same pace as reported inflation, putting most people a few percent behind each year when considering the increasing costs that they actually pay.

Rising labor costs may contribute to the dreaded "wage-price spiral" of 1970s notoriety, which, when combined with high energy costs and a devalued dollar could spell real trouble for the world's leading economy.

The Fed hopes that companies will be slow to pass these higher labour costs on to consumers. Their profit margins are, after all, unusually wide at the moment. But labour compensation is now growing almost as quickly as nominal GDP, suggesting that workers, having accepted a surprisingly small share of the national cake in recent years, are getting hungrier.

In his congressional testimony last month, Mr Bernanke gave warning of the dangers of an “inflationary psychology”. If people suspect that faster inflation is here to stay, they will anticipate it in their wage claims and their price-setting, thus confirming their own suspicions. Are the fatter pay packets of the first six months of this year evidence of such a psychology?

Mr Bernanke clearly thinks not. His willingness to hold rates, even when one of his colleagues thought he should raise them, shows his confidence in his own credibility—he does not feel the need to prove his inflation-fighting mettle to his doubters. Indeed, for all the chatter about “Helicopter Ben”—a man willing to throw money from the skies to keep prices from falling—the broader public seems to trust him. According to the University of Michigan's July survey, America's consumers expect the prices they pay to rise by 3.2% over the next 12 months. This is smaller than the rise they expected in May or June, and smaller than the actual increase (4.3% in headline consumer prices) they experienced in the 12 months to June.

Mr Lacker clearly thinks the Fed should do more to make this relatively happy forecast come true. But Mr Bernanke thinks that the central bank may have already done enough. The slowdown in growth evident last quarter was not an accident. It was due in part to the rate increases that the Fed voted for many meetings ago.

The Fed's latest projections, unveiled last month, foresee growth of 3.25-3.5% this year and 3-3.25% next, slow enough, it thinks, to stop core inflation rising much further. Unfortunately, the American economy, though it flies with strong wings, is not very good at smooth landings. In the space of 12 months from February 1994, Mr Bernanke's predecessor raised rates from 3.25% to 6% in a successful effort to stabilise inflation without increasing unemployment. In 2000, he tried the same trick, raising rates from 5.75% to 6.5%. By March of the following year, the economy was in a recession few had expected.

Mr Lacker, an inflation hawk, was the first to break formation with the new Fed chairman. But in the difficult months to come, he may find some doves peeling off in the opposite direction.

Does Ben really know the pickle that he is in, or do some people just worry too much?

The next Fed meeting should be a fun one with everyone back from summer vacation, offering even more opinions of what the new Fed chief should do.

[A side note: As the print version of this magazine is the preferred method of reading, and the online version is only accessed to copy and paste text and pictures for the daily fare which you are now reading, occasionally, this URL is accidentally typed instead, only to be reminded once again that this was not what was being sought.]