Ben Bernanke, chairman of the US Federal Reserve Board, indicated Tuesday that the Fed would hold interest rates steady in the face of mounting inflation and the depreciation of the US dollar. He departed from tradition, whereby the head of the US central bank refrains from making public comments on currency questions, deferring to the treasury secretary, to say that “in collaboration with our colleagues at Treasury, we continue to carefully monitor developments in foreign exchange markets.”
He went on to say that dollar weakness had “contributed to the unwelcome rise in import prices and consumer price inflation,” and declared that the Fed would be “attentive to the implications of changes in the value of the dollar for inflation and inflation expectations.” Bernanke added that the Fed would “formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.”
That policy, aimed above all at averting a major bank collapse and financial panic, came to a head with the Fed’s moves last March to prevent Bear Stearns from filing for bankruptcy protection and to forestall other Wall Street failures by allowing major investment banks to borrow directly from the Fed—a move unprecedented since the Great Depression of the 1930s.
The Fed’s policy of bailing out Wall Street contributed to the downward pressure on the dollar and an explosive run-up in the price of oil and other basic commodities.
Bernanke somewhat obliquely referred to the recessionary implications of his dollar-boosting, anti-inflationary shift by noting that “the demand for US exports arising from strong global growth has been an important offset to the factors restraining domestic demand, including housing and tight credit.” The growth of US exports has largely been the consequence of the cheaper dollar, which lowers the relative cost of exports and increases the cost of imports into the US.
A central concern of the Fed and of financial markets is to preempt what are referred to as “inflationary expectations.” This is largely a euphemism for wage increases. The job-cutting impact of recession will be used to undermine workers’ demands for wage hikes to offset rising prices.
According to statistics released Wednesday, the cost per unit of labor in the US rose at an annualized rate of 2.2 percent in the first quarter of 2008, a figure significantly lower than the current inflation rate of about 4 percent. In real terms, wages in the US are falling at a rate of almost 2 percent a year.