Wednesday, November 19, 2008
Consumer prices drop the most in 61 years
This shows the futility of raising interest rates to address demand driven increases in commodity prices. The Fed's long march to a 5.25% fed funds rate, from 1%, was part of what caused the housing market to peak. The Fed did this because it caved in to pressure that we there was rising inflation, yet, the rise in commodity prices simply were a reflection of a global boom (and speculation--they could have addressed that, but chose not to). Moreover, there was little or no wage inflation throughout the course of the gains in commodities.
Even the ECB has reversed course.
Eventually, commodity prices would have stabilized at some higher plateau and that element of inflation would have abated. Instead, the Fed chose to fight it with higher rates, and support a weak dollar (also caving into concerns about the dollar's exchange value). That's a good part of what burst the bubble.
Ironically, the Fed has had a wonderful opportunity to allow the dollar to rise dramatically, but opted to engage in massive forex swaps that put a cap on the dollar. This selling of the buck by the Fed will turn the dollar's trend down again. It may already be starting.