Tuesday, August 05, 2008

Bernanke's Fateful Decision

The Stock Market is on an unusual rise, the dollar is on an up swing, and gas prices are in decline. Furthermore, we just recently learned that the economy grew in the last quarter, which means we are not in a recession (regardless of how it "feels"). All of these examples of good news should lead to better news today when Federal Reserve Chairman Ben Bernanke discusses the future of interest rates.

Bernanke has, of course, three options. He could raise rates to further curtail concerns about inflation, lower them to make sure that there is enough stimulus to keep the economy growing, or keep them the same as a reasonable response of not pouring fuel on inflation or stalling an apparent economic turn around. Bernanke's decision is very important.

If Bernanke lowers the rates, expect a continued decline in the value of the dollar, serious concerns being raised about the economy's future health in the minds of those on Wall Street (because lowering rates would be seen as the Fed still being concerned about a recession), and the simple fact that interest rates will be getting too close to zero for its own good. After all, rates can't go below zero. If Bernanke raises rates, an idea being suggested by some as a way of saying the economy is now on the mend and to stop potential inflation, the short term impact would likely be devastating. It would be seen as the pouring of cold water on an economy that is only now beginning to warm up.

The best approach, according to most economists, is to simply do nothing. This sends a message that the economy has begun to rebound and it doesn't need further stimulus. The psychological boost on Wall Street to such an approach will be very powerful. It could be argued that there is too much money in the market today any way. Doing nothing would be an excellent way to let productivity catch up with the many dollars that are floating around in the economy today. Since too much money chasing too few goods creates inflation, restraint is helpful. It will be the first time in a very long time that the Fed has shown such restraint. The physicians motto of "do no harm" should be Dr. Bernanke's as well. Let's just hope he is a good physician.

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Kevin Price is Host of the Houston Business Show (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review.

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