.gif){kind=logo}
Paul Volcker, the Fed chairman who succeeded at squashing inflation in the early 1980s, once said controlling psychology is one of the most important functions for the Fed's head.Yesterday, the current Fed head, Ben Bernanke, left the Fed Funds rate unchanged at 5.25%, saying he is still watching for inflation. If the Fed is doing anything, it is watching inflation go down.
During the next few months, the Fed will use the weakening credit market as its vehicle to suck out any excess liquidity from the economy and crush any expectations that inflation will soon to return.
With the long bond rallying, gold pricing stable and the junk-bond market shut down, Bernanke knows he is close to being done. Another month or two of pain and he will be fighting deflation rather than inflation expectations. Then the money pump will be turned back on.
Once again, OPEC has killed the goose that lays the golden egg
Closing Bell: Markets bounce after yesterday's sell-off; BA, F, GE, DOW all up, GS down 
Where have all the consumers gone?
Reader Comments (Page 1 of 1)
8-08-2007 @ 2:40PM
Tom said...
The Fed and Bernanke are doing well. Let the markets adjust. Don't jump in every time there is some pain. Let the markets work out the excesses in home building, mortgages and credit.
8-08-2007 @ 2:45PM
Suzanne said...
If you believe that inflation is only 2-3%, you haven't paid a medical bill, your car mechanic or an electric bill recently...or gone to a restuarant and been handed a "new" menu (only the prices have gone up!) or shopped in a supermarket!
8-09-2007 @ 3:34AM
Ryan said...
It's impossible for the market to work out the kinks described in the previous post if A) The government controls inflation as it is doing now by dictating prime rate, instead of the analysts finding out what the confluence of lenders doing business say the prime rate is B) There is no objective value (standard) of the dollar; faith in anything is not an objective value, faith cannot be measured, yet how is it we know what the dollar is worth? Government dictating inflation is also dictating how much value the dollar will lose. More over, the gov says the dollar is backed by faith in the US Government. This is not true, US Citizens fund the US Government and generate the productive value of the dollar for the government to control, where is the faith actually held? C) The Fed prints money and those persons running the fed are allowed to keep their private jobs as the work for the government. The constitution specifically says congress shall provide for money printing needs, not a quasi private/government institution. The market will never be well in this environment. We are facing a much worse monster than the founders ever faced with stamp and tea acts held over their heads.