If he could do it all over again, Fed Chairman Ben Bernanke might opt to return to the low-stress occupation of an economics professor. Having already endured the fallout from the subprime mortgage market collapse and the onset of a sluggish economy, the venerable Chairman now has to deal with what seems to be runaway inflation and a potential deepening of the housing and financial market crises.

Inflation has become a more pressing concern for Bernanke and Co. as revealed by the minutes of the FOMC's June 24/25 meeting that were released this week. Details showed committee members talking tougher on inflation, and this was several weeks before the most recent readings on consumer and producer price indexes. Both of these releases showed prices climbing at their fastest rates since the early 1990s.  While mostly attributable to skyrocketing food and energy prices, the "core" component (excluding food and energy) has increased for months at a pace significantly higher than what policymakers would normally deem ‘acceptable'.

While the European Central Bank has a more-straightforward responsibility, i.e. focus on price stability and nothing else, the Federal Reserve's dual-purpose of price stability and promoting economic growth have painted it into a corner: raise rates to head off the rise in inflation expectations and potentially send the economy into a full-blown recession, or keep rates steady and hope for the best. Right now it looks like they're choosing the latter option. The near-collapse of Fannie Mae and Freddie Mac certainly has made navigating this minefield more difficult, but quick fixes by the Fed and Treasury appear to have prevented the housing market from completely imploding. (For more detailed coverage of the Fannie/Freddie mess, check here and here). Will there be an Act IV? If so, Bernanke probably would prefer it to be a happy ending.


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