Last week, oil prices took a roller-coaster ride — falling when Federal Reserve Board chairman Ben Bernanke expressed concern about inflation, then shooting to record highs when a federal jobs report announced the largest one-month jump in unemployment in 20 years. The price movements bolstered arguments that the Fed’s loose monetary policy has weakened the dollar and inflated a bubble in the price of commodities. To wit, speculators deserted oil when Bernanke talked tough about inflation, then rushed right back into the market when the jobs report put pressure on Bernanke to cut interest rates again.
The Fed’s dual mandates — to foster maximum sustainable employment and to maintain price stability — have come into conflict. The dismal jobs report has prompted calls for a rate cut to spur employment, but further rate cuts would weaken the dollar and send oil prices higher. Since the Fed commenced its drastic rate-cutting in September, the value of the dollar has fallen by nearly 20 percent against the Euro, and the price of oil has nearly doubled.
Shrewd market-watchers attributed last Friday’s sudden spike — a breathtaking single-day increase of $11 per barrel — to speculators’ betting that Bernanke will cave to political pressure stemming from the jobs report and cut rates one last time. Bernanke had expressed his concerns about inflation in two speeches he delivered early last week, but after nine months in which the Fed has cut interest rates from 5.25 to 2 percent, the markets weren’t convinced.
Monday night, Bernanke delivered a third speech in which he took an even stronger stand against further rate cuts. The recent unemployment figures “have affected the outlook for economic activity only modestly,” he said. Sounding tough on inflation, Bernanke said the Fed “will strongly resist an erosion of longer-term inflation expectations.”
Bernanke has staked out the right approach. A strong signal that U.S. policymakers are committed to fighting inflation is the key to putting the brakes on out-of-control energy prices. By contrast, the federal gas-tax holiday that John McCain has proposed is unlikely to have any effect on gas prices, which recently reached a national average of $4 per gallon.
Instead of pushing this gimmicky idea, McCain should be voicing his support for a strong dollar and advocating pro-growth tax policies as an alternative to incessant interest-rate cuts. We understand the difficulty of selling a cut in the corporate tax rate in the current political environment, but such a tax cut would boost employment and make American products more internationally competitive, without weakening the dollar.
Campaigning for president in 1980, Ronald Reagan understood the importance of combating the stagflation of the 1970s. As a solution, he offered to cut taxes, reduce spending and decrease regulation. John McCain frequently says he was “proud to be a foot soldier” in Reagan’s pro-growth revolution. Now that it’s McCain’s turn to lead, he would do well to remember Reagan’s approach and emulate it.