As European Central Bank Prepares Rate Increase, Fed May Have Bungled

The Fed sat still yesterday. It could not decide which was worse, inflation or the slowing economy. It tried to play Solomon and offered to cut the baby in two. It did not see that the mother that wanted the child most was the bearer of inflation.

The European Central Bank sees things differently. Among its members the consensus seems to be that inflation is the more troubling problem. According to the FT, "Jean-Claude Trichet, the president of the European Central Bank, earlier expressed fresh concern about inflation and wage growth, strengthening expectations that the ECB would raise its main rate by 0.25 percentage points next week."

With only a day gone since the Fed’s decision, it already seems to be the wrong one. Warren Buffett, who is usually to be trusted in his opinions, said that inflation is burning like a wild fire. To use his term, it is "exploding".

The increase in costs is obviously not restricted to the US, which may be one reason that the Fed should try to fight it hard on its own ground. Some level of the stuff is going to hit America from abroad. As Reuters recently pointed out, "Asia cemented its status as the 21st Century workshop of the world by exporting the goods global consumers loved at prices that kept falling. Now it’s producing the one thing the world hates — inflation."

The Fed may be surprised if the consumer price index moves up at a rate of 6% or 7% over the next several months. A lot of people paying buckets of money for gas and food will not be. Once the Fed turns its big guns on the problem, it may already be out of range.

The time for the Fed to begin the fight was yesterday.

Douglas A. McIntyre