Will The Fed Tame Inflation Before It's Too Late?

Mr. Bernanke had his second interview with 60 Minutes on Sunday, right before the interview of Mark Zuckerberg, CEO and founder of Facebook. It’s hard to tell who is more powerful these days: one who commands the monetary policy of the US, or one who is actively shaping the ways we interface and communicate with each other in the digital world.

In Zuckerberg’s interview, 60 Minutes asked quite a few questions not always easily answered by Mr. Zuckerberg. In Bernanke’s interview, the questions were much easier. It is quite interesting though, in the answers Bernanke gave, to explain why there should be no fear of inflation with the QE2 program:

1. “One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way.”

2. “We could raise interest rates in 15 minutes if we have to.”

Mr. Bernanke, of course, is right on both counts. The Fed is not printing money, it’s just buying Treasury securities. However, following that logic, why just buy $600 billion? Why not buy $1 trillion, or $10 trillion, as trillion has replaced billion as the monetary unit since the financial crisis? Then of course, we do not want to get into the business of predicting the future.

On the second point, it is also true that the Fed can just hold a special meeting and raise interest rates in 15 minutes time. But then, of course, the question is: How much will the Fed raise? Will the Fed raise interest rates if unemployment still persists, even if inflation becomes an issue? If raising interest rates has the slightest hint of popping the sustainability of growth, will the Fed still do it? Since the program aired, the market voted to take the yield of 10-year higher.

There should be no doubt that the Fed has the tools to conquer inflation, as Paul Volcker demonstrated in the 70’s. Like the deal between the administration and the Republicans, which highlighted the doubt of the will of the government to reduce deficit, the question on everyone’s mind is whether the current Fed has the will to tame inflation before it’s too late. Given the history of the Fed since Mr. Volcker left his Fed chairman post and the nickname of Mr. Bernanke, one is right to be doubtful.

Daniel Ho is the founder of 10xreturn.com, a financial portal providing financial information and market statistics for investment professionals.

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