June 4, 2008 | posted by Michael Baxter in US economy, inflation |

And with just a few words he was the golden boy again.

Fed chairmen are surely the most commonly vilified men in business.  Well, at least they are up there with private equity and bank directors.

Ben Bernanke put his foot down, and down pumped an awful lot of gas into the US economy over the last few months – the result – it looks increasingly as if the US will avoid recession, but inflation has burst onto the scene.

Actually, US inflation is not really that awful, yet, but the fear is that the high price of oil will exert pressure down the line.  Alan Greenspan slashed rates earlier this decade, and now, or so goes the argument, we are paying the price; the fear is Bernanke has made the same mistake.

The US rate of interest is 2 per cent, meaning the real rate – that’s after inflation – is negative, but then again, credit is hard to come by, banks are charging interest out at much higher rates than official Fed rates – maybe it doesn’t matter.

Others say the Fed went wrong because it both pumped money into the system and cut rates.    The ECB by contrast has just gone for the money – and, or so goes the argument, as it has to be repaid, the move is not inflationary.

But what has Ben been up to?  Is he aware of the inflation danger?

Yesterday he spoke, and in particular he zoomed in on the falling dollar.  “In collaboration with our colleagues at Treasury, we continue to carefully monitor developments in foreign exchange markets,” he said, and the Fed was “attentive to the implications of changes in the value of the dollar for inflation and inflation expectations.”

And then he struck the hawk note. The Fed will “formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.”

So what does it mean?  The US is unlikely to cut interest rates any time soon.  Capital Economics said, “If oil prices drop back later this year there may still be scope for a further reduction in rates.”

The markets also concluded that the time of a free falling dollar with the Fed doing nothing has ended, and the greenback rose sharply on that and the price of gold and oil fell.