Tuesday, August 05, 2008

Wanted: A Tough-on-Inflation Message to Boost King Dollar

The Fed meets today and will announce its policy decision at 2:15 p.m. Let’s hope it talks tough on inflation and King Dollar.

Yesterday’s consumer inflator report was up 4.1 percent over the past year, the biggest rise in 17 years. Core inflation is much lower at 2.3 percent, but still above the Fed’s target. Right now commodity markets are nose-diving across the board. This is a good sign for diminished future inflation risk.

Much of the commodity plunge is driven by the oil slump, where black gold has fallen under $119 a barrel — falling another $2.50 today. I attribute this mainly to the drill, drill, drill movement that was launched by President Bush almost a month ago and is now catching fire politically throughout the country. Even Obama appears to be joining it, sort of.

Traders are now handicapping a pro-drilling strategy offshore and domestically by selling futures. Even retail gas pump prices have dropped below $4 a gallon. Gold is off nearly $20, and has fallen below $900. Stocks are surging over 200 points on the reduced energy tax and the hope of a decline in the future inflation tax. All of this is good.

There even is evidence that the demand for dollars is picking up. The monetary base and M1 are both surging in recent months. At the prevailing 2 percent fed funds rate, the Fed will add reserves to accommodate higher money demands. That is probably why base growth has jumped to nearly 10 percent at an annual rate from a zero reading four months ago.

I think much of this dollar stability is a sign of more credit confidence in the banking system as the federal authorities have backstopped Wall Street and Fannie and Fred. But the inflation question and the value of the dollar is far from solved — even despite some recent favorable omens.

Demand-siders on Wall Street want the central bank to stay easy in order to stimulate the economy. But supply-siders know better. The Fed should take back its last quarter-of-a-point rate cut in order to strengthen the dollar and send a message on price stability. Washington should drill, drill, drill to produce more energy supplies and should move to lower the corporate tax rate while keeping the Bush tax cuts in place.

Undoubtedly the Fed will not move its rate up today. But it would be nice if Bernanke listened to hard-money Fed presidents like Dick Fisher of Dallas, Gary Stern of Minneapolis, and Charlie Plosser of Philadelphia. A tough-on-inflation message to boost King Dollar would bring energy and other commodity prices even lower in the months ahead. A hard dollar, not a soft one, is the best pro-growth policy.