The Great Bernanke Bluff

[screembloodymurder]

The Fed has started to talk tough about inflation. If you listened to the rhetoric over the weekend and Bernanke today, the Fed is out to tame commodity prices. But Bernanke is bluffing! Think about it. The Fed has raised rates 16 times since 2003 and commodity prices just kept going up. Now the economy is slowing and if they continue to raise rates the economy will tank. Truth is, they're almost out of ammunition and the wolves (commodity prices) are still at the door? The Fed is using scare tactics, because their only hope is to scare the wolves away before firing their last shot.

[Democrats_win]

1. I hope he's bluffing. Critics of making Bernanke FED Head was that he is

such an inflation hawk that he'll raise interest rates even when doing so makes no sense. Critics worried that rising commodity prices and rising interest rates could lead to a recession.

[screembloodymurder]

2. Housing is soft, and the market is cracking.

People aren't traveling because of high gas prices. Under the circumstances, raising rates risks disaster. One more rate hike and the screams you hear will be the Republicans screaming for Bush's head. Besides, how are we going to pay those higher bond rates when we ain't got no tax revenue?

[porkrind]

3. Commodity prices are soaring partly because of monetary inflation

The gov is printing money like crazy, which devalues everyone's greenbacks. That's why gold spiked recently. Now they're worried about inflation?

[On the Road]

4. They're Almost Out of Ammunition?

Is there a ceiling? The prime rate hit 21% under Paul Volcker (although it floated rather than being directly raised).

[screembloodymurder]

6. My arguement is that the consumer is in bad shape.

Many have borrowed heavily and many have adjustable rate morgages. I think the US is 3 raises from a sharp recession. I think that's what the markets are saying. Now if you're a President who has fucked up everything and whose only positive is a decent economy, how would you feel if the Fed destroyed your last shread of dignity? Bush will be all over Bernanke with the next raise. Therefore, he's out of ammunition.

[On the Road]

7. That is True

but the counterargument is that the consumer may not trump accelerating inflation and the declining dollar. I don't know what Bernancke's going to do -- you could make an argument for either -- but I don't believe he's in Bush's pocket.

[Warpy]

5. I don't think he's bluffing

for two big reasons: first, since the dollar continues to decline in value, they have to make treasury debt look a lot more attractive to foreign central banks. The only way to do that is to raise the interest it pays far beyond the potential for decline.

Secondly, it's about the only ammunition they have to deal with an inflationary economy. Unfortunately, they've also got a man in the White House who thinks if he runs out of money he can just print more of it, so it's simply not going to work as an inflation control. It will nicely kill what's left of the consumer economy, though, as jobs dry up and credit gets tightened.

So yes, expect interest rates to keep going up. It's how the government is going to stay solvent. Don't expect it to do a damned thing about inflation, though, and don't expect the economy to do anything but get worse for average citizens.