At the nudging of the Schiff family, I just read through Ben Bernanke’s speech from Tuesday that generated lots of headlines because he said the word “inflation” and the word “dollar” in the same sentence. In the words of an e-mail blast I got from financial Armageddonist Peter Schiff:
Cheered by the fact that Ben Bernanke has finally mentioned the falling dollar, the market now seems convinced that the cavalry is on the way, and the dollar will turn around. However there is a huge chasm that separates recognizing a problem and actually doing something about it.
Peter’s point is that the only thing the Fed can do to rein in inflation is to raise interest rates, and raising interest rates would exacerbate all the economic difficulties that Bernanke has spent the past ten months trying to combat. My take is that Bernanke doesn’t actually want to rein in inflation right now. Moderate inflation can play a big role in softening the pain of the housing bust (because it means fewer homeowners will be under water on their mortgages). So what Bernanke and his colleagues at the Fed want is for inflation to stay above average until house prices stop falling a year or two (or three) from now, then drop. With his speech, Bernanke was trying to jawbone down expectations of future inflation while not actually doing anything about current inflation. Will inflation cooperate? I dunno; ask inflation.