Thursday, July 10, 2008

The Fed's Inflation Fight

"The [Fed] stayed true to its recent news leaks yesterday and held its target interest rate at 2%. In lieu of action, Chairman Ben Bernanke and his mates decided merely to talk tougher about inflation, signalling that they may lack the will to tighten money in an election year. ... The consumer price index is rising at a rate roughly double the fed funds rate, and the CPI is a lagging indicator. ... Every American who drives or shops for groceries understands this, except at the Fed, where they bow before something called 'core inflation.' ... But don't worry: Yesterday's Fed statement averred that it 'expects inflation to moderate later this year and next year.' ... According to the Conference Board's June survey of consumer sentiment, Americans believe inflation over the next 12 months will be 7.7%. That's up from 6.8% in April, 5.4% in February, 5% last September, and the highest in the last 20 years. ... Meanwhile, inflation continues to rise around the world, especially in what the Paul Volker Fed understood was the 'dollar bloc'," my emphasis, Editorial at the WSJ, 26 June 2008.

"The [Fed] in March believed it had no choice but to help facilitate the rescue of iconic Wall Street investment firm Bear Stearns Co. [BS] to protect financial markets, minutes of March meetings released Friday show. ... 'Given the fragile condition of the financial markets at the time, the prominent position of [BS] in those markets and the expected contagion that would result from the immediate failure of [BS], the best alternative was to provide temporary emergency financing to [BS] through an arrangement with J.P.Morgan Chase & Co.,' according to the minutes of a March 14 meeting of the Fed's Board of Governors. ... J.P.Morgan said certain [BS] assets would add 'significant uncertainty to the level of risk it would assume at the same time it was acquiring the remainder of [BS],' the minutes said", WSJ, 28 June 2008.

I disagree with the WSJ's statement, the Fed bows "before something called 'core inflation'." I no more believe that than I do in the tooth fairy. Core inflation is something Uncle Sam created to justify lowering TIPS interest rates, increasing tax bracket creep and reducing future social security payments.

Talk of "moral hazard"! The Fed "bought" $29 billion of assets I assume JPMorgan didn't want and tried to conceal this by making it appear to have loaned $29 billion against them. If the "Street" was so afraid of contagion, Vikram Pandit, Stephen Schwartzman, Lloyd Blankfein, et. al., should have bailed out BS with each's personal assets. What was the Fed afraid of? A few investment bankers getting smaller bonuses this year? The Street plays a good game of "chicken' with the Fed. It's more than time the Fed let the Street drown in its own mess.

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