Beranke & Co.'s Decision

What do the 1980's and today have in common? Both had economic climates that dealt with low interest rates in an attempt to kick the can down the road and hope to instill trust back into the banking system.  The idea results in a desire to not have banks officially declare their losses, but instead "extend and pretend" while keeping low interest rates in place to help them give off the illusion of billion dollar profits.  The idea in theory allows the banking system to rebound and continue to be profitable while giving off the illusion of a healthy financial system.  Nobody wants to invest, or is willing to invest in a failing financial insitution.

The other idea is to create inflation by weakening the nation's currency.  Inflation is not a bad thing.  It is a symptom of a growing economy.  In a healthy economy inflation is created by the increase in people spending money, therefore the price of goods increases as demand increases.  Then due to a rise in the price of every day items, individuals ask to get paid more-which puts more money into the economy, which once again makes prices go up.  Inflation ideally should not be caused by currency manipulation.  That is now water under the bridge.  The Fed has pushed the dollar to near-historical lows, and has caused investors to seek commodities, such as gold and oil, which have a fundamental value.

The Fed is stuck.  Do they keep interest low and allow oil to jump back to its 2008 highs of $140/barrel? Do they raise interest rates and signal to the market that they feel they've done enough to stabilize the markets?

Tomorrow at 12:15pm we will find out if Bernanke and Co. opted for a sharp increase in U.S. interest rates, or keep rates low and have American families paying $4.50 a gallon this summer.

Chart of the U.S. Dollar