The Volcker anti-inflation model presumably handed down to Alan Greenspan and Ben Bernanke always argued that price stability is the cornerstone of economic growth. Yet it appears that today's Fed has reverted to a 1970s-style Phillips-curve mentality that argues for a trade-off between unemployment and inflation, rather than the primacy of price stability.
History teaches us otherwise. It states that since rising inflation corrodes economic growth, inflation and unemployment move together -- not inversely. Even in the last 18 months this is proving true. Inflation bottomed around 1 percent in late 2006. Unemployment bottomed at 4.4 percent about six months later. Today, the CPI inflation rate has climbed to over 4 percent, wholesale prices have jumped to 7 percent, and import prices have spiked to 18 percent. Unemployment, meanwhile, has moved up to 5.5 percent.
Over the past five years, the greenback has lost 40 percent of its value. Oil is close to $140 a barrel. And gold, now trading above $900 an ounce, is warning that if the Fed fails to stop creating excess dollars, inflation could rise to 6 percent or 7 percent.
I had hoped Ben Bernanke would reveal his inner Volcker at Wednesday's meeting. He didn't. While the Fed acknowledged that "the upside risks to inflation and inflation expectations have increased," it took no action to raise the fed funds target rate, which now stands at 2 percent and is actually negative 2 percent adjusted for inflation. Even a quarter-point rate hike -- merely taking back the last easing move in April -- would have been a shot heard 'round the world in defense of the beleaguered dollar. It didn't happen.
Only Richard Fisher, president of the regional Dallas Fed, dissented in favor of a higher target rate. That leaves the hard-money Fisher as the lone remaining protege of Paul Volcker.
Of course, if Fed policymakers reconvene immediately to right their wrongheaded mistake, the value of our money could be quickly restored. The next scheduled Open Market meeting is Aug. 5, but they needn't wait that long.
Let's hope they come to their senses.