We could spend a month of Sundays hashing through the nuances of Bernanke’s expressed stance on the dollar from yesterday's unprecedented news conference. Rather, in today’s issue of The Schork Report, we focus on what currency traders thought of Mr. Bernanke’s comments.
At 2:15pm ET when the chairman began speaking, the U.S. dollar could buy 0.6792 euros. By the time he stopped talking one hour later, the dollar could buy only 0.6779 euros; a decline of 0.2%. At the time of this writing (around 10:15 pmEST) the dollar could buy only 0.6744 euros (-0.7%).
Clearly, currency markets were underwhelmed with the Fed's, as well as Treasury's, strong-dollar rhetoric of the last 48 hours. Given that correlation on the €/$ cross has climbed since mid-March from -0.02 (i.e. virtually no relationship) to -0.79 (i.e. a very solid inverse relationship), the dollar’s response is extremely worrisome for
What is also a concern was Bernanke’s punt on headline inflation (food and energy):
...we have seen near term inflation expectations rise fairly significantly, which is reasonable given higher commodity prices, higher gas prices. But for the most part although there has been some movement here and there, for the most part I think it’s fair to say that medium term expectations have not moved very much and they still indicate confidence that the Fed will ensure that inflation in the medium term will be close to what I called the mandated consistent level.
After all, the Fed can't create more oil. We don't control the growth rates of emerging market economies. What we can do is basically try to keep higher gas prices from passing into other prices and wages throughout the economy and creating a broader inflation which will be much more difficult to extinguish.
This fearful response brings to mind Thomas Sowell’s recent quote:
When the Federal Reserve cites statistics to claim that there is not much evidence of inflation, we need to keep in mind that the statistics they rely on exclude food and energy prices. The cost of living is no sweat if you can do without electricity and food.
Indeed. Perhaps in some arcane academic sense, inflation is close to the Fed’s mandated consistent level. But, in the real world, we are in lousy shape. In 2002 it cost us $0.095 a kWh to turn the lights on in our home, $0.18 for a cup of milk and $1.24 a gallon of mogas to drive to work. Today, it costs us $0.133 per kWh for our electricity, $0.22 for a cup of milk and $3.55 for a gallon gasoline.
As analyzed in today’s issue of The Schork Report, compared with 2002, today it costs us 40% more to power our house, 25% more to get our calcium and 185% more to drive to work (assuming we are still employed).
But, according to Mr. Bernanke, these costs our within the Fed’s mandate.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.