Interest Rate Roundup

Tuesday, June 03, 2008

Bernanke talking a bit tough

Federal Reserve Chairman Ben Bernanke is speaking via satellite to the International Monetary Conference in Barcelona, Spain. A lot of his comments just recap what we already know. But I would say the comments on inflation look a bit hawkish. Moreover, the Fed seems to be indicating that it is paying more attention to the dollar ... and that could be significant.

Anyway, here are a few potentially import comments (with my emphasis added in bold):

On inflation:

"Unfortunately, the prices of a number of commodities, most notably oil, have continued upward recently, even as expectations of future policy rates and the foreign exchange value of the dollar have remained generally stable in the past few months. The possibility that commodity prices will continue to rise is an important risk to the inflation forecast. Another significant upside risk to inflation is that high headline inflation, if sustained, might lead the public to expect higher long-term inflation rates, an expectation that could ultimately become self-confirming."

And on the dollar:

"In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets. The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations."

By the way, notice the qualifier "for now" in this excerpt below. This tells me that the Fed is not going to hike immediately, but that it is giving itself the wiggle room to start hiking at any time. My read anyway ...

"For now, policy seems well positioned to promote moderate growth and price stability over time. We will, of course, be watching the evolving situation closely and are prepared to act as needed to meet our dual mandate."

After earlier being up, long bond futures are now trading down about 9/32 to the day's lows. Crude oil is down $1.30 and gold is off by about $12. The dollar index is on its daily high.


  • Mike,

    It's clear to me that the fed has no foresight whatsoever. They completely missed the housing bubble and in a larger context the credit bubble. Not comforting.

    I continue to see CPI inflation and asset deflation. I think Bernanke does too. He's trying to appease both sides. It's a lose-lose situation.

    By Anonymous Anonymous, at June 3, 2008 at 1:02 PM  

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