A friend at the Fed?

 Now, some of my supply-side friends take issue with my optimistic view on inflation. They believe the recent run-up in gold prices to over $500 an ounce signals excess money creation and much more inflation ahead. Therefore, some argue, the central bank must keep tightening and raising its target rate for at least another year.

 But I believe this is a 1970s view -- one that abstracts from the Internet Google revolution and the record productivity surge, and also ignores the global spread of capitalism, which has taken hold in the post-Reagan years and has increased the demand for scarce commodities across the board.

 Consider this: Daily average volume in the Treasury bond market runs up to nearly $90 billion according to the Chicago Board of Trade. Gold trading, however, is well below $50 million, even in the recent rally.

 In other words, the vast breadth, depth and resiliency of the bond market suggest that this forward-looking indicator has the most clout in the world marketplace. This does not mean that gold is irrelevant as a monetary signal -- but it does suggest that the Fed is on the right track with what appears to be a newly created bond-price-rule approach to policy. In other words, the central bank seems to be using the bond market as its leading real-world indicator.

 In my view, this is as it should be. And if the authorities are still worried about a touch of future inflation, all they need do is sell bonds from their huge portfolio in order to drain liquidity and bypass the unnecessary fed funds rate target altogether.

 As for gold, it may still be taking the temperature of global war and political uncertainty, and today it could be telling us more about the threat of nuclear weapons in Iran than the future course of American inflation.

 For years, conservative economists have argued for a well-defined price rule. As the Fed moves into the Bernanke era, it looks like we're getting one. Between forward-looking bond markets and backward-looking basic inflation rates, the central bank should be able to find the right policy that will not interfere with the day-to-day inspirations of the American entrepreneurs who have made our form of prosperous capitalism the envy of the world.