Again today, Fed Reserve Chairman Ben Bernanke sounded like a dove in terms of willingness to really fight inflation. I repeat what I have written numerous times before that the Fed approaches all of this all wrong when it manipulates interest rates rather than targets a steady dollar (through other means at its disposal). In the long run, I would NOT advertise a significant rate hike, therefore, or for that matter ANY particular effort by the Fed to set interest rates. The rates should float. That said, in the short run, if the Fed is indeed to keep using the interest rate manipulation model that it has used for the past few decades, it will be making a huge mistake if it keeps interest rates way down at 2 percent while inflation rampages. I still believe that if he becamse hawkish vs inflation now, while he still can, by doing one quick rate hike to 2.5 percent, it would send such a signal to the markets that the Fed will keep inflation in check that lending institutions would, counterintuitively, being cutting long-term mortgage rates. I explained this to a greater degree in an earlier post I do not have time to dig up. But the point is that inflation is a serious danger, and Bernanke is playing with fire by not nipping it in the bud. It’s very disheartening.
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