I’ve just read Bernanke’s latest speech. It’s long and boring. Historically, the Fed fails to recognize that inflation in the world money supply causes prices to rise, and it fails to recognize that its own actions influence growth in the world money supply by influencing other central banks and through exchange rates. The Fed simply pursues a nationalistic monetary policy and ignores the rest of the world. It really doesn’t care if the dollar is rising or falling, and it’s blind to all currencies falling against gold. Bernanke retains all of this limited vision. Consequently he rationalizes sharply rising commodity prices by invoking high demand overseas (as if it were exogenous and uncaused by anything the Fed has done) and various supply disturbances like droughts or excessive rainfalls, which are almost always present somewhere on earth and almost invariably are invoked to justify price movements in commodities. I never believe these facile explanations.
The bottom line is that the Fed will continue its low interest rate policy even though QE2 is coming to an end. There is no QE3 ready in the wings, but that means little. These QE programs were widely heralded large-scale interventions that propelled the Fed’s balance sheet higher. I expect that the Fed will, for a time, revert to form, which is to continue expanding its balance sheet, but at a less steady rate and a lower rate, and without announcing that the major trend will be up. It will continue monetary expansion. That’s my belief. Bernanke didn’t say this explicitly, but he said as much because he said that policy would continue accommodative and with zero interest rates until further recovery was evident in the economy. There’s little reason to expect robust recovery, what with the incentive to save and invest being so poor.1:54 pm on June 8, 2011 Email Michael S. Rozeff