Ben Bernanke: The Gradualist Fed Chairman

For example, crude oil bottomed out just above $17 per barrel in November 2001, only two months after 9/11. A year later, prices moved above $25, up 47%. The upward speculative momentum for oil took off at the end of 2003 from around $32.50 a barrel, up 91% from the November 2001 bottom. Where was the deflation?

In its ill-advised worries over deflation, the FOMC flooded the world with liquidity, forcing the dollar much lower vs. the euro, and tempted traders and hedge funds to speculate not only on crude oil and commodities, but also on real estate.

Bernanke on Gradualism

The second interesting speech given by Bernanke was on May 20, 2004, titled "Gradualism." This speech set up the measured pace rate hikes that began on June 30, 2004. What's interesting in this speech is that Bernanke viewed gradualism as a better way to control long-term interest rates. But instead it created the "bond conundrum."

Following the May 2004 FOMC meeting at which the FOMC kept the funds rate at 1%, the end of the press release read, "At this juncture, with inflation low and resource use slack, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured." The FOMC told the market that the federal funds rate will begin to be raised at its next meeting on June 30, 2004 in 25 basis point increments. The 30-year yield reached its high point of 5.58% on May 14, 2005, marking the beginning of the bond conundrum.

As a result of keeping rates too low for too long and maintaining an accommodative monetary policy while raising rates, the Federal Reserve funded the bond conundrum and carry trades. Wall Street applauds the Fed and the president's nominee, while Main Street is just starting to feel the pain of higher mortgage rates, higher energy costs and higher property taxes -- all the result of the funds rate being pushed to an artificially low 1%, and the subsequent measured pace of hikes to 4%.