In currency trading following Bernanke's speech, the dollar rose significantly and gold fell. In the money markets, futures traders are pricing in a Fed rate hike, perhaps as early as late October, with a whole series of rate hikes predicted for next year. I don't expect the Fed to rush into rate hikes anytime soon. However, there is another way for the central bank to bolster the buck.
In recent months, the Fed's emergency-lending operations have injected something like $400 billion of cash reserves into the troubled banking system. So in the months ahead, while keeping the fed funds target rate steady at 2 percent, the Fed can gradually unwind some of these emergency loans as the banking system continues to heal and balance sheets continue to repair.
This would reduce some of the excess cash that has contributed to the weaker dollar. Meanwhile, a more reliable currency could end the speculative oil-and-commodity boom that has been leaking into consumer prices via the beleaguered greenback. Then, as the economy picks up later this year, the Fed can move to a gradual nudging-up of its target rate.
All this said, the Bernanke move is a huge plus for prosperity. And for the life of me, I don't know why Sen. John McCain doesn't take a cue from Bernanke and mount a King Dollar campaign of his own.
McCain needs to speak to the food-and-oil-price-hike inflationary fears of Main Street voters across the country. Why not promote a "McCain Dollar," taking a page from Ronald Reagan and his anti-inflation run in 1980? That would not only send a message to cash-strapped families, whose incomes are being swallowed by weak-dollar food and gas prices, but also a strong-dollar message around the world to bolster American power and prestige.
There are a lot of things broken in Washington right now, including the dollar. There's overspending and earmarking. There's a ridiculously complex tax system that imposes multiple tax burdens on capital, investment and saving. There's the entitlement problem. And the energy system needs to be totally deregulated so that free-market forces can promote a full portfolio of conventional and new energy sources.
Big Mac can fix what is broken in Washington, including the busted dollar. The sooner McCain adopts this reform message, the closer he's going to get to victory in November.
Quite simply, a strong currency -- along with pro-growth tax, spending, entitlement and energy reform -- is the winning message.