The Fed's Big Bluff
Aug 11, 2006
This week, as the Fed came through with its highly anticipated
pause, it conspicuously left the door open to future rate hikes.
Apparently the rhetorical vigilance took most currency traders
by surprise, sending many scrambling to buy dollars. However,
given that any weaker statement would have caused a stampede
out of the dollar, how surprising should the tough talk have
been? Any indication that this was not a "wait and see"
pause would have sent both long-term interest rates and consumer
prices up, undermining the "benefits" of the pause.
So in an apparent attempt to have its cake and eat it too, the
Fed "paused" while pretending that it really had not
The Fed's claim that it is concerned about inflation, and that
it will act decisively to contain it, is just a bluff. Any real
commitment would have prompted the Fed to have already raised
rates much higher. For the Fed to suggest that it stands ready
to raise rates in the future, if the data warrants it, completely
misses the point that the data warrants it right now!
The flawed CPI is nonetheless a lagging indicator of inflation.
There is so much inflation already in the pipeline that its
effect on consumer prices will be seen for years to come. For
now, the Fed's private concern is to keep the markets from understanding
just how bad inflation already is, and how little resolve it
actually has to do anything to contain it. Far from being concerned,
the Fed likely views inflation as the only solution to America's
problems; a monetary "get out of jail free card."
The U.S. now owes so much to foreigners that not only is legitimate
repayment impossible, but the very act of servicing the debt
will soon become unbearable. Debt repudiation through inflation
likely appears to be the most politically palatable "solution."
Perhaps out of fear of being blamed for an economic downturn,
the Fed's overriding concern now appears to be keeping the U.S.
from falling into a recession. Without a pause, this would likely
be impossible, so pause it must, inflation be damned. My guess
is that the Fed will continue to ignore evidence of worsening
inflation, using growing signs of a weakening economy as cover
for its complacency. All the while it will continue to brag
about its "vigilance" and commitment to hiking rates
further should inflation become a threat.
The $64 trillion question is just how long it will be before
the markets call the Fed's bluff. Once it shows its cards, we
had all better batten down the hatches, in preparation for a
monetary perfect storm. Though Greenspan may have sown the winds,
it's Bernanke and the rest of us that will reap the whirlwinds.
Don't wait for the financial
storm to blow in. Protect
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C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
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Mr. Schiff began his investment career as a financial consultant
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finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
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