Tuesday, July 22, 2008

Is The Fed In Crash Dive Mode?

Krishna Guha at FT writes this morning that the Fed has moved towards an inflation bias.

If Guha is correct, the Fed may very well crash the economy.

According to Guha, this inflation bias comes in spite of the continuing troubles at Fannie Mae and Freddie Mac, extreme volatility in bank stocks and the recent dip in the price of oil.

He focuses on the June 30 Fed meeting where the minutes of that meeting say:

With increased upside risks to inflation and inflation expectations, membersbelieved that the next change in the stance of policy could well be an increase in the funds rate.

Bernanke is no Alan Greenspan. He will never get away with tightening money now, if he does we could very well have a stock market crash of the October 1929/October 1987 variety, with an accompanying recession.

Is this where Bernanke is going? Who really knows with this guy? I have never before seen a Fed that has gone from double digit money printing to zer growth, but that has just occurred with this Fed.

M2NSA money supply growth has been flat--zero growth--for the months of May and June. If Bernanke thinks he needs to get around to fighting inflation now, then he doesn't even realize what he has been doing for the last two months.

Further, given the failure of IndyMac, the fears of a bank run have escalated, which means that some bank customers from around the country are likely to have pulled their funds from banks and those funds are now in the form of physical currency. Thus, there are likely to be all kinds of distortions in the money supply numbers which make a shift in Fed policy at this time particularly insane.

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