Last September, Bernanke’s Fed surprised the markets with a 50 bp rate cut, the first monetary easing since 2001. The central bank was thereby addressing the economic risks posed by the housing-originated credit crisis in a context of already declining economic activity. Judging by the different Fed’s members statements, recession should be a low-probability outcome, but the potential risks were considered high enough to justify a preemptive movement. The markets expect a new rate cut the October 31 and the Fed will surely deliver. At the end of the day, Bernanke’s leadership doesn’t seem to be as different from his predecessor’s. Greenspan has been accused for being too complacent with financial bubbles, for cutting rates quickly and raising them reluctantly. His policy, together with other factors that fostered productivity and curved inflation, contributed to a long period of prosperity, but also to the development of two consecutive and very harmful groups of bubbles: the technological one, whose burst in 2000 led to recession one year later, and the housing and credit bubbles, responsible for present fears. What kind of bubble might the Fed be about to generate now?

To be fair, this Fed should not be definitively judged until a new expansionary economic cycle begins, since previous criticisms have had more to do with “slow hiking” than with “quick cutting”. Anyway, some unwelcome consequences can already be observed. In fact, a new bubble might be developing with the help of the Fed: a commodities bubble. In recent weeks, most commodities have experienced a significant surge in their prices. Oil, in particular, has reached new historic records above $90 per barrel, even being very close to the 1980 highs in real terms. Although there are several factors explaining this evolution, one of them is the Fed. On the one hand, lower US rates have fostered dollar depreciation. As most commodities are traded in dollars, their prices tend to rise in dollar terms. The costs for the US are clear: higher input costs. The harm is less evident for those economies whose currencies appreciate against the dollar, although their exports suffer. On the other hand, the rate cuts favor financial investment. The housing and credit crisis have reduced the range of available assets and so shares and commodities have been particularly favored.

These reflections point at one of the most urgent challenges for central banking: how to deal with asset inflation. They are well equipped to address goods and services inflation, but have no clear answers when price assets are out of equilibrium. How could they deal with this?