Fed head Ben Bernanke, at his first-ever news conference on Wednesday, slammed the door shut on any new QE3 pump-priming. The $600 billion QE2 program to purchase bonds will end on target at the end of June, and that will be that. Mr. Bernanke also suggested that the Fed’s “extended period” for the near-zero federal funds target rate could end in a couple of meetings. Perhaps these announcements suggest a bit-less-easy monetary policy. Perhaps.
But Mr. Bernanke had no defense of the sinking dollar, or the inflation it brings, or the drop in middle-class living standards it causes. So it’s little surprise that gold prices surged $24 to $1,526 during the Fed chairman’s press conference. Silver jumped sharply as well. The markets clearly don’t see any King Dollar shift by the Fed.
Mr. Bernanke just doesn’t get that inflation-sensitive market-price indicators — like rising gold, oil, and commodity indexes, and the falling dollar exchange rate — are trying to signal higher future inflation. Instead of listening to markets, he is determined to fight them. This is a losing battle. Instead of a market-price rule (anchored by gold) we have some sort of Bernanke fine-tuning rule. It’s not working.
While Mr. Bernanke slightly downgraded the central bank’s economic outlook and slightly upgraded its inflation concern, the Fed still holds out “hope” that the sluggish 2 percent first-quarter GDP will give way to 3 percent or more growth later this year, and that the commodity-based bulge of inflation will come back down as commodity prices somehow sink. This seems to be a triumph of hope over experience.
With the CPI running about 6 percent annually in the first quarter, the real inflation-adjusted fed funds rate is deeply negative. Under similar circumstances in Europe, Jean-Claude Trichet raised the ECB target rate by a quarter of a percent last month. By that benchmark and others, the Fed’s so-called return to normalcy is way behind the curve.
Look, the economic emergency dating back to the fall of 2008 has long been over. And the alleged deflation threat has completely dropped off the radar screen. In the absence of these risks, the Fed’s ongoing emergency policies — including the zero target rate and the $600 billion QE2 — make no sense at all and should be withdrawn.
I recall how President Reagan often argued in the 1980s not simply that a strong dollar was in the nation’s interest, but that a great country, by necessity, needs a strong and reliable currency. Link to gold — that was Reagan’s argument. Paul Volcker and then Alan Greenspan (during the first three of his four Fed terms) essentially agreed with Reagan. The 20-year collapse of gold prices that ensued was associated with a remarkable non-inflationary prosperity and a huge stock market rally that generated unbelievable volumes of new wealth for investors and entrepreneurs.
Today, this hard-money thinking is nowhere to be found in official Washington. Yes, the Fed can produce new money. But no, it can’t produce new jobs and growth in any permanent sense. What does? Limited spending, flat tax rates, minimal regulation, and stable money.
Now where’s the next great American leader to revive and restore this pro-growth model?
– Larry Kudlow, NRO’s Economics Editor, is host of CNBC’s The Kudlow Report and author of the daily web blog, Kudlow’s Money Politic$.