Weak U.S. Dollar May Be `Checkmate' for the Fed: Caroline Baum

When the Federal Reserve talks about the risks to the economy, be it slower growth or higher inflation, it's usually an either/or proposition.

What if it's both? What if the U.S. economy is facing the prospect of slower growth and higher inflation, a dual diagnosis requiring offsetting actions for each symptom?
Certainly that's where the risks lie, as Fed Chairman Ben Bernanke pointed out in congressional testimony last week.

``The Committee recognized that risks remained to both of its statutory objectives of maximum employment and price stability,'' Bernanke said, explaining policy makers' outlook at the conclusion of the Oct. 30-31 meeting.

Bernanke enumerated the ``downside risks'' to the Fed's already slow-growth forecast: a deterioration in financial market conditions; a further tightening of credit standards; a steep decline in home prices that depresses consumers' willingness to spend; and a deceleration in business investment in response to a dimming economic outlook.

As for inflation, it's the usual suspects that pose a risk, according to the Fed chief: the soaring price of oil and other commodities and the decline in the foreign exchange value of the dollar. These price changes may be symptoms, not causes; they may be relative price shifts (in the case of commodities), not inflation per se. The Fed doesn't elaborate on how it views the cause-effect relationship between policy and prices.

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