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Fed "Falling Behind The Curve"?

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Tags The FedMoney and Banks

04/30/2006

Bloomberg News notes increased nervousness among traders that the Fed will "fall behind the curve" after comments from Ben Bernanke that indicated the Fed might pause in its rate hike campaign soon. The market have reacted by raising the spread between regular 10 year securities and the TIPS to a record 2.68% (Still unrealistically low spread in my view) and by sending the dollar sharply lower both against gold and against other paper currencies. Gold now costs $655, the U.K. pound $1.825, the euro $1.26, the Canadian dollar 90 cents ,the Aussie dollar 75 cents and the Japanese yen 0.885 cents ($1 is worth 113 yen), all much higher than just a week ago and all much higher than during the beginning of the year. This trend is likely to continue , particularly against gold.

The Fed's dilemma is that if it does not pause in its rate hike campaign soon, it runs a great risk of sending the U.S. economy into a recession. But if it does pause, price inflation is likely to accelerate further and the market confidence in the Fed's "inflation-fighting" (i.e. its willingness to limit its own inflating) credentials will erode further. Either way, Bernanke is going to have a hard time and the outlook for the dollar is not good.

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