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Bernanke: Ich Bin Ein Inflation Hawk

The Fed chief stresses global growth in a Berlin address.

Federal Reserve

Chairman Ben Bernanke reminded the markets Tuesday that central bankers' concerns run well beyond national borders.

Worries about a possible U.S. recession have weighed on stocks in recent days. But Bernanke, speaking in Berlin with the next Federal Open Market Committee Meeting looming in a week, steered clear of any discussion of interest rate policy.

Instead, he warned listeners about the danger of trade imbalances -- and implicitly made the case against cutting the fed funds overnight interest rate target sharply from its recent 5.25%.

"Bernanke reminded the markets of the strong global growth factor," says Joe Brusuelas, chief economist at IDEAglobal.

Bernanke said that while "some of the details have changed, the fundamental elements of the global savings glut remain in place."

It was no coincidence that stocks rose on a day when the Fed chief chose to focus on the strength of world growth -- not on the problems cropping up in credit markets or in some parts of the U.S. economy.

"What Bernanke is saying is that the current crisis is serious, but the big underlying pictures haven't changed," says Marc Chandler, chief foreign exchange strategist at Brown Brothers Harriman. "Globalization and those savings pent up in people's mattresses in China finally coming into the marketplace ... that hasn't changed."

That means that China still intervenes in global markets by buying U.S. Treasuries with the spoils of its export-driven economy. Their U.S. bond buying keeps our real interest rates low, a phenomenon that former Fed Chairman Alan Greenspan called a "conundrum."

Chinese investors' appetite for U.S. credit also means that China's reserve account of more than $1 trillion will likely continue to depress interest rates -- not just in the U.S., but around the world. This in turn helps mitigate the effects of an apparent economic slowdown in the U.S.

Thus far, the global economy remains mostly intact. The International Monetary Fund just last week increased its global growth forecast to 5.3% in 2007 from 5.2%, according to a Bloomberg Report. That's despite Japan's inability to get off the ground. Its government Monday reported that growth was negative in its second quarter.

Emerging markets also haven't crumbled in the wake of the credit crisis that has gripped the market for short-term lending, adds Chandler. He says Russia, China and Brazil have been resilient. Many of these economies have gone a long way to improve fundamentals, build trade surpluses or revamp their financial systems, says Chandler.

Growth overseas, including in developing countries, is helping to fuel demand for U.S. exports. The government earlier reported that the U.S. trade deficit fell to $59.2 billion in July from $59.4 billion in June. July's level is down 15% from its record high one year ago at $68.4 billion.

For now, multinational companies are profiting from growing overseas sales.

In the first quarter of this year,

U.S. profit growth surged beyond investors' expectations on the back of overseas demand and a favorable exchange rate. Companies like

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But one factor boosting exports is a weak dollar -- a potentially worrisome development because a weakening greenback threatens to cause inflation at home. The inflation threat looms large because traders expect any cut in the fed funds rate to further depress the value of the dollar.

A softening dollar -- the U.S. currency is nearing record lows vs. many peers, including the euro -- could also cause strong-currency economies to suffer.

In the case of Europe, the euro could quickly make record highs. An even stronger euro may stunt the growth that has helped fuel all outsized overseas profits. The European Central Bank recently cut its forecast for growth in Europe to 2.5% from 2.6%.

A weak dollar likewise means that U.S. consumers may import inflation from overseas. Imported goods get more expensive for U.S. consumers as the money in their pockets means less and less.

What Bernanke didn't say is that such an outcome would reverse the inroads the Fed has worked hard to make against inflation by keeping the fed funds steady for more than a year.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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