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Rate rise won't help, economists warn
July 20, 2006 - Sydney Morning Herald
WHEN the Federal Reserve chairman, Ben Bernanke, testifies about the American economy to a US Senate committee overnight (Australian time), all eyes and ears will focus on his view of inflation and any hints of whether he will keep raising interest rates in order to curb it.
But some analysts think the Fed has less influence over inflation these days, making higher interest rates less effective as a tool to control it. They fear further rate increases could slow the economy and hurt consumers without reducing inflation.
Today's inflation, these economists believe, is driven substantially by rising prices of commodities and basic materials - oil, copper, aluminium, steel and others. Commodity inflation, they argue, is the result of forces largely beyond the control of US interest rates: political volatility in the Middle East, for example, and demand for materials from the rapidly growing economies of China and India."
AntiSpin: Bernanke got one thing right yesterday, the US economy is slowing. But as we learned in our interview with James Rogers in May, the economy is also experiencing cost-push inflation, and as this story points out, there is little the Fed can do about it. But it appears that both Bernanke and the markets still believe in the theory of a Non-Accelerating Inflation Rate of Unemployment (NAIRU), that the prospect of increasing unemployment in a slowing economy will contain inflation pressures, so further rate hikes are unnecessary. When Bernanke announced yesterday that Interest Rate Hikes May Be Over, the news sent the DOW up 212 points. However, as we learned from Martin Mayer in our interview that we plan to publish shortly, NAIRU is a collective delusion destined for the trash heap of politically convenient economic theory, along with supply-side economics. When the markets figure this out, this rally will have turned out to be an excellent opportunity to take short positions.
July 20, 2006 - Sydney Morning Herald
WHEN the Federal Reserve chairman, Ben Bernanke, testifies about the American economy to a US Senate committee overnight (Australian time), all eyes and ears will focus on his view of inflation and any hints of whether he will keep raising interest rates in order to curb it.
But some analysts think the Fed has less influence over inflation these days, making higher interest rates less effective as a tool to control it. They fear further rate increases could slow the economy and hurt consumers without reducing inflation.
Today's inflation, these economists believe, is driven substantially by rising prices of commodities and basic materials - oil, copper, aluminium, steel and others. Commodity inflation, they argue, is the result of forces largely beyond the control of US interest rates: political volatility in the Middle East, for example, and demand for materials from the rapidly growing economies of China and India."
AntiSpin: Bernanke got one thing right yesterday, the US economy is slowing. But as we learned in our interview with James Rogers in May, the economy is also experiencing cost-push inflation, and as this story points out, there is little the Fed can do about it. But it appears that both Bernanke and the markets still believe in the theory of a Non-Accelerating Inflation Rate of Unemployment (NAIRU), that the prospect of increasing unemployment in a slowing economy will contain inflation pressures, so further rate hikes are unnecessary. When Bernanke announced yesterday that Interest Rate Hikes May Be Over, the news sent the DOW up 212 points. However, as we learned from Martin Mayer in our interview that we plan to publish shortly, NAIRU is a collective delusion destined for the trash heap of politically convenient economic theory, along with supply-side economics. When the markets figure this out, this rally will have turned out to be an excellent opportunity to take short positions.
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