Julia Child made cooking look easy. The same cannot be said about U.S. Federal Reserve Chairman Ben Bernanke and monetary policy. He makes it look painful.
On Thursday, the U.S. Federal Reserve decided it’s in everyone’s best interest, particularly that of French banks, to increase U.S. dollar liquidity in Europe. Stocks traded up on the news, especially the French banks, while bonds such as German bunds and U.K. gilts fell, as did the U.S. dollar against the euro. All in all, another example of how interventions switch the risk trade on and off depending on the mood of the day.
The European Central Bank (ECB), the U.S. Federal Reserve, the Bank of England, the Bank of Japan, and the Swiss National Bank announced they will join forces to support three U.S.-dollar liquidity-providing operations to help deal with the shortage of dollars in Europe. The move will fill in the gap left by private investors who have failed to reinvest in expiring credits.
The move should raise red flags for a number of reasons. For one, it appears the Fed is fighting deflationary forces across the pond while blowing on the inflationary tinder here at home. It is helping to prop up the banks, like the French ones with lots of Greek debt, via the ECB.
Back in the U.S., the Bureau of Labor Statistics announced Thursday that the Consumer Price Index increased 0.4% in August on a seasonally adjusted basis. It’s up 3.8% over the last 12 months. And here’s a shocker: the things you and I need to survive—like gasoline, food, shelter, and apparel—are way up. The Fed likes to strip those components out of its inflation measures; I wish they were that easy for everyone else to forget. Gas prices increased for the 12th time in the last 14 months. The energy index has increased 18.4% over the last year. The food index increased 4.6%, and the food at home index 6.0%.
Stock investors have cheered the recent moves by the Fed, but at some point all this money activity has to come home to roost. I would suggest the Fed take a step back from further intervention and recognize that “mastering the art of French cooking” isn’t as easy as it appears.
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