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Intervention will not stop dollar’s slide
Peter Schiff
Asia Times
Monday, July 7, 2008
The US Federal Reserve last week took a step closer to acknowledging reality. Unfortunately, it didn’t let that admission move it from a policy course firmly guided by fantasy.
In its policy statement, Fed chairman Ben Bernanke & Co took the important step in noting that inflation expectations had taken hold in the country at large. However, in asserting that it expects inflation to moderate this year and next, the Fed gave no indications that these heightened expectations are gaining traction within the rate-setting Federal Open market Committee itself.
As a result, it signaled no likelihood that it was actually prepared to do something to fight a problem it doesn’t really believe exists in the first place.
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In fact, by indicating that it expects inflation to moderate, the Fed is saying that elevated expectations are unwarranted. In other words, Bernanke claims that despite the fact that so many people are carry umbrellas, he still believes it will be a sunny day. The takeaway from the statement is that no rate hike is forthcoming.
The markets saw this position for what it is … capitulation to inflation and a weakening dollar. No surprise then that the gold responded with the biggest single day gain in more than 20 years!
With the ensuing carnage on Wall Street, many Thursday-morning quarterbacks claimed the Fed missed an opportunity to reverse the dollar’s slide by either talking tougher or perhaps actually raising rates a quarter point. If the Fed really believed it could talk the dollar up, or that a small rate hike would do the trick, it would have given it a try. I believe it chose a dovish route because of a greater fear of having their hawkish stance casually disregarded.
Imagine what would happen if the Fed raised rates and the dollar kept falling? It would be like one of those horror movies where someone holds a cross up to a vampire, and the Count tosses it aside with nary a cringe.
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