Wikinvest Wire

Ben Bernanke and "inflation expectations"

Tuesday, June 10, 2008

The U.S. dollar is strengthening after a sort of shock-and-awe campaign by the U.S. government yesterday - as he left for Europe, President Bush called for a stronger dollar in the wake of soaring energy prices, then Treasury Secretary Paulson said in an interview with CNBC that he would "never" rule out currency intervention, and New York Fed President Tim Geithner said the central bank is "watching" the dollar.

All of this concern over the international value of the dollar is a result of, well, the declining international value of the dollar.

Contrary to the long-held popular belief amongst Federal Reserve economists, the declining international value of the dollar is now thought to be somehow related to rising prices in the U.S.


But, yesterday's most important "dollar talk" came from Fed Chairman Ben Bernanke himself. In a speech about analyzing inflation, he provided the weightiest words on the subject, going so far as to say that the central bank will "strongly resist" any rise in inflation expectations.

Those wearing Fed decoder rings have translated this to mean, "if prices don't stop rising, we will begin threatening not to lower interest rates four times a week instead of twice a week, and if that doesn't work, we'll start threatening not to lower interest rates daily".

Here's the excerpt from the speech:

Inflation has remained high, largely reflecting sharp increases in the prices of globally traded commodities. Thus far, the pass-through of high raw materials costs to the prices of most other products and to domestic labor costs has been limited, in part because of softening domestic demand. However, the continuation of this pattern is not guaranteed and future developments in this regard will bear close attention. Moreover, the latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations. The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation.
Let's see, over the last year or so, one-year inflation expectations from the Reuters/University of Michigan Consumer Sentiment survey have risen from about 3.0 percent to the current 5.2 percent, an increase of over 70 percent.

During the same period, the Conference Board's Consumer Confidence Survey shows one-year inflation expectations rising from 4.6 percent to 7.7 percent, an increase of just under 70 percent.

This isn't an "erosion" or an "unanchoring"?

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Edward Harrison said...

I don't believe a word Bernanke says. Caroline Baum had a good column a few days back that sort of spelled out what a lot of people think: it's all show. The guy has zero credibility as a hawk.
Caroline Baum

Russ Winter had a good column about this today. Not that I agree 100%, but interesting:
Russ Winter

Here's my take as well:
Edward Harrison

Anonymous said...

Hope readers understand that the only things that can be done to truly support the currency are spending cuts and interest rate hikes. What is the likelihood of that happening? Go ahead, make my day.

little larry sellers said...

I don't know what's more appropriate, an image of Ben in a helicopter dropping money onto the masses, or Ben in a pith helmet with matching khaki shirt and shorts hacking interest rates to pieces with a machete. Has Kal done any cartoons with a Safari Ben motif? It might be appropriate with the new Indiana Jones images around. Maybe Ben could run down a tunnel while the boulder of inflation chases him.

I agree with Tim on the rate cuts. The question of the Fed cutting rates isn't a matter of probability, it's a matter of frequency. How much, how fast, how soon.

Aaron Krowne said...

This is my favorite picture of Ben.

Expat said...

Ben is a stinkin' liar who is probably getting ulcers and regretting the day he accepted the job. Good for him; I hope they become perforating ulcers.

Having lied about the real rate of price inflation, changed the methodology, and still failed to quell it, Ben has shifted to "expectations" of inflation.

This is absolutely beautiful. If price inflation continues to rise, Ben will simply blame us because we expected it and therefore caused it.

This analysis was valid when US employees had leverage and could get higher wages. With de-unionization and the appalling state of the jobs market, employees are lucky to get a ride home after getting fired.

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