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Oil Ignores Bernanke's Tough Talk on Inflation

Posted Jun 10, 2008 11:17am EDT by Aaron Task in Newsmakers, Commodities, Recession
Related: LEH, WM, UBS, OIL, USO, DBC, SPY

The stock market is struggling to recover from an early dip Tuesday as traders contemplate the latest inflation-fighting rhetoric from Fed Chairman Ben Bernanke.

The Fed "will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation," Bernanke said in a speech Monday evening.

This is the latest in a series of hawkish comments from Bernanke who is trying to "jawbone" the market into believing the Fed is now focused on fighting inflation and defending the dollar.

Futures markets are now placing high odds on a Fed rate hike in the second half of 2008, helping the greenback hit a three-month high vs. the yen Tuesday while rallying vs. the euro as well.

But rate hike expectations overlook the reality of Bernanke's bind: If he chooses to fight inflation, Bernanke risks scuttling the economy and undermining the very fragile recovery in the financial sector. But if he doesn't act, inflation might spiral out of control.

Bernanke also had some tough comments about oil prices, but crude futures were rallying again after Citigroup and Merrill Lynch upped their price targets while the International Energy Agency lowered its supply forecast.

My concern is Bernanke might fold if and when the financial markets ultimately call his (as well as Treasury Secretary Paulson's) bluff about the dollar and inflation.

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