Full Astern Ahead

three blind mice — Fri, 27 Jun 2008 05:16:14 -0800

The US Federal Reserve has allowed ... its credibility fall "below zero". Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. "This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility." Central bank credibility plays a pivotal role in much of the modern literature on monetary policy, yet it is difficult to measure or even assess objectively. In essence, monetary credibility helps the central bank do its job, by inducing private sector participants also to take actions that help achieve the central bank's low inflation objective. Barclay's chief equity strategist, Tim Bond, cautioned ""There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth." On Wednesday, the tortise the decided to keep its target for the federal funds rate at 2 percent.

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