With the dollar tanking, inflation will rise, giving Bernanke two reasons to make the next move UP, not down. And yup, you know what that'll do to the markets and housing. So be it.
It is NOT the Fed's role to protect asset prices. It's the Fed's role to fight against inflation. Even the incompetent Alan Greenspan, Mr. Bubble himself, telegraphed how this latest bubble would end, and I think with the Alt-A and Subprime meltdowns we're now at the "investor caution" stage:
Rising house and stock prices have made many people feel more wealthy and have helped to support consumer spending, a key ingredient of the economy's good health.
Greenspan, however, said people shouldn't count on that paper wealth, which can evaporate if economic conditions deteriorate rapidly.
"What they perceive as newly abundant liquidity can readily disappear," he said. "Any onset of increased investor caution" could cause home and stock prices to drop, he noted.
A long spell of low interest rates and low risks for investors has especially encouraged investment in homes. Greenspan worried about what would happen if that climate were to change.
"History has not dealt kindly with the aftermath of protracted periods of low-risk premiums," he said.
And this on the Fed's conundrum to move up or down:
Notes from the Federal Reserve rate-setting committee’s late-March discussions, released last week, highlighted that inflation is its biggest concern and that it is leaning toward interest rate increases to curb it, but it may have other cards up its sleeve.
“The committee agreed that further policy firming might prove necessary to foster lower inflation, but in light of the increased uncertainty about the outlook for both growth and inflation, the committee also agreed that the statement should no longer cite only the possibility of further firming.”
Those nebulous comments may dredge up uncomfortable memories of the tenure of Fed chairman Paul Volcker (1979 to 1987), when he chose to curb the nation’s stagflation—characterized by high rates of both inflation and unemployment—by limiting the growth of the money supply and allowing interest rates to rise. That caused a recession in the early 1980s and unemployment levels second only to those of the Great Depression.
