Today’s the big day. The Fed’s Open Market Committee meets to decide on interest rate policy.
The price of gold rose US$6 yesterday – to US$723. The euro held above US$1.38. Oil went back to over US$80. And the commodity index rose to a new record high.
The Fed must be worried. If it lowers rates – as we’ve predicted – it risks lighting a fire under inflation. Oil could go over US$100. Gold could go to US$1,000. Not the end of the world – but surely a shock for the world as it is.
On the other hand, if it doesn’t cut rates, it runs the risk that the housing market will continue to slump…dragging the economy down with it. The risk is that a slight slump may lead to a deep one…and that – with all that iron around their throats and ankles – Americans may not be able to keep their heads above water.
One way could lead to inflation…the other to deflation. Clearly, in the financial world…the great credit zeppelin hit a utility pole this summer. Since so many speculative products are marked to model, not to market, it is still not clear how much deflationary damage was done. The housing market is much more transparent, but there the market functions very slowly. So we don’t know how much deflation is already in the system there either. Team Bernanke has to guess.
It has to guess, too, about how markets will react to a “Bernanke Put” signal – an apparent willingness of the Fed to protect speculators by increasing the supply of credit at the expense of inflation and the value of the dollar.
In past Markets and Moneys, we’ve reckoned that we couldn’t know which way it would go. Inflation? Deflation? All we know is that there is a heckuva lot of “flation” in the world economy. The mass of debt is a huge black hole of potential deflation. But the kinetic energy of cash and credit is a great source of potential inflation. One way or t’other, ‘flation’ is bound to happen.
Markets and Money