Editorial: Fin de siecle?

The question on many people's minds is whether this is the end of the series that began last August. Indeed, the inflation numbers are hardly consistent with the recessionary signals emanating from the GDP numbers. Consumer price inflation was at an annual rate of 2.6 per cent, while the core inflation rate, which excludes food and energy prices, was at 2.2 per cent. These levels are typically associated with somewhat higher growth numbers than are being seen today. If the US Federal Reserve were an inflation-targeting central bank, its stance could well have been very different. In any case, with oil prices rising to unprecedented levels and food prices also surging, it is only a matter of time before inflation concerns bump growth concerns off the priority list. Markets are already betting that further cuts in the federal funds rate are unlikely. Many analysts are also warning of the unintended consequences of taking the rate down too far and keeping it there for too long.

 

The excesses of financial innovation and investment strategies that led to the unravelling of 2007 are being attributed to the huge surge in liquidity as a consequence of the US having followed this approach in the past. If Federal Reserve Chairman Ben Bernanke were to take this interpretation seriously, he would most likely be inclined to hold steady from now on and wait for the impact of the recent cuts as well as the benefits flowing from the fiscal stimulus package to work their way through the system. If this is indeed the case, the world will watch with bated breath to see whether what has been done so far is enough to stimulate and sustain a recovery. If it does, Mr Bernanke is assured his place in history. If not, the world economy is in for a rather bumpy ride over the next couple of years.