Ben Bernanke got back on message with his strongly worded statement yesterday that, “maintaining low and stable inflation is essential for achieving both parts of the dual mandate assigned to the Federal Reserve by the Congress. In particular, the evidence of recent decades…supports the conclusion that an environment of price stability promotes maximum sustainable growth….”
He specifically mentioned the mild upcreep of recent inflation reports over the past 3-6 months as being, “unwelcome developments.”
Stock markets have been jolted downward, and this correction will run its course. But more rate hikes from the central bank as they drain excess cash from the economy will in the medium and longer run, be very positive for the economy and stock market.
In effect, Bernanke is reaffirming his numerical inflation target of 1 percent to 2 percent. Basically this is a price rule that will conquer long run inflation expectations. It’s a good thing.
Meanwhile, the economy is much stronger than Wall Street and media demand-siders are telling us. Profitability is high; productivity is strong; business is healthy; jobs are rising; and tax rates are low. Commodity stocks are plunging as the dollar is recovering.
This is as it should be, as markets discount a slower pace of dollar creation. When dollars are scarce, the greenback rises. Before long, this will spread to rising financial assets, especially stocks. Commodity assets are sold. This forms the basis of the market correction.
But the health of business will carry the day after the correction is completed.
It is good to see Mr. Bernanke regain his footing. His monetary manhood is back. He is putting away his Neville Chamberlain umbrella.
Inflation appeasement is over.