Fed Inflation Talk; Skeptical Investors

123jump.com Staff
03 Jun, 2008
New York City

Chairman Bernanke in his latest speech appears to stress the importance of controlling inflation expectations and protecting U.S. dollar. The renewed stress on dollar and focus on inflation lifted dollar. However, investors remain skeptical. In the past, the Fed has talked tough on inflation and seen the Fed lower inflation to a historic low. Food and energy inflation in the last five years and rising home prices in the last ten years have only ravaged consumer purchasing power.

[R]10:15AM New York – Fed chairman stresses the importance of containing inflation in his speech. The US dollar gains a little.[/R]

Fed Chairman Bernanke in his comments talked about the risks of higher inflation driven by rising commodities prices. In a speech delivered via satellite at the International Monetary Conference, Bernanke stressed on the importance of keeping the inflation in control and monitor the developments in the foreign exchange markets.

The Fed’s focus appears to be on the rising inflation and falling dollar value in the international markets.

In his comments he noted, “For now, policy seems well positioned to promote moderate growth and price stability over time.” The Fed for the first in recent months also stressed the foreign exchange markets and Bernanke added, “In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets.”

Chairman Bernanke stressed the importance of keeping inflation under control. He added in his comments, “The possibility that commodity prices will continue to rise is an important risk to the inflation forecast. Another significant upside risk to inflation is that high headline inflation, if sustained, might lead the public to expect higher long-term inflation rates, an expectation that could ultimately become self-confirming.”

The tough talk on inflation has been common at Fed for the last three years yet consumers see little respite from the rising food and energy prices. Oil prices have jumped more than five times in the last six years and food prices in the recent months have steadily edged higher. The Fed’s indicators of measuring inflation also appear to not factor in home prices that have nearly doubled in the last ten years.

Investors in the last five years have gravitated to the view that Fed promotes growth at the cost of inflation and dollar.

On the comments the dollar edged higher against yen and euro. Dollar gained 1 cent to $1.54 against one euro and added nearly 1 yen to 105.36 yen to a dollar.