From the Greenspan "put" to the Bernanke "pushover"

For the third time in 24-hours, a commentator was heard asking the same question regarding yesterday's quarter-point rate cut by the Fed, "How can more easy money help fix the mess that too much easy money created?"

Aside from the one reply noted yesterday, "Has it ever been anything other than that?", there weren't any answers forthcoming.

In a story from The Economist, similar questions are asked. They reason that credit markets are still fragile, troubles in housing continue to worsen, and the mood of the consumer is quickly souring, but the most important incoming economic indicators - jobs, economic growth, and inflation - all point to benign conditions.

If anything, rising oil prices may be about to push consumer prices higher, so why make money easier? Has Ben Bernanke become a "pushover"?

Nonetheless, this week’s decision carries risks. One is tactical. The Fed has validated the impression in financial markets that investors’ expectations drive the central bankers’ decisions. It has done nothing to dispel the idea that if Wall Street clamours loudly enough for a rate cut—and futures markets price one in with any degree of certainty—the Fed will oblige. The Greenspan put has in effect been replaced by the Bernanke pushover.

The second risk is that the central bankers pay too much attention to potential weakness while underestimating the dangers from inflation. Although there are ill omens aplenty, the economy’s resilience thus far has been remarkable...By the same token, today’s benign core inflation figures may be understating price pressures, particularly given the falling dollar and record oil prices.

Higher oil prices will begin feeding through into the inflation statistics in a big way starting with the October consumer price report in two weeks - the BLS may report year-over-year inflation of close to four percent once again.

Since the September inflation data was published, both gasoline and heating oil have soared. Compared to last year at this time, following the late-2006 energy sell-off, energy prices are now about 30 percent higher.

The Bernanke "pushover"? Maybe not.

Ben Bernanke probably knows what the inflation reports are going to say in two weeks and figured he'd rather cut rates in October instead of waiting until December when inflation may not be so benign.

Based on early morning trading in equity markets, however, he may have to cut rates in December regardless of how bad inflation is.