Balancing Inflation and Growth – Part 7 of 13

At the same time, I am fully aware that the FOMC must be careful to not undermine that recuperative process. Here, of course, I Predict Market Turning Points refer to the potential harm to the consumer and the business and financial sectors alike by unwittingly allowing the perception to take hold that, as the New York Times editorialized in its lead front page article last Thursday, “the Federal Reserve, signaled [its] readiness … to bolster the economy with cheaper money even though inflation is picking up speed.”

Talk of “cheap money” makes my skin crawl. The words imply a debased currency and inflation and the harsh medicine that inevitably must be administered to purge it. So you should not be surprised that I consider the perception that the Fed is pursuing a cheap-money strategy, should it take root, to be a paramount risk to the long-term welfare of the U.S. economy.

I believe 241- Forex the Times overstates its case. Chairman Bernanke made clear in his congressional testimony last week that we are monitoring inflationary pressures and expectations closely. And yet, I understand the source of the Times’ sentiment. In a globalized capital market where money is free to move anywhere it pleases, there is scant tolerance for even the slightest whiff of inflation. Since the January FOMC meeting, longer-term rates, including those on fixed mortgages, have risen rather than followed the federal funds rate downward.

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