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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: Sam who wrote (1754)	6/11/1999 3:06:00 PM
From: Henry Volquardsen	Read Replies (2) of 3536

At the risk of being called a heretic I will suggest that neither the Bank of England or the Fed is currently motivated by inflationary expectations. In the case of England I believe they are trying to manage the currency, especially vis a vis the Euro. They can't say that of course because the potential of sterling joining the Euro is still a very contentious political topic. Also they have this clear mandate to manage inflation so they at least have to pay lip service to inflation. But a review of recent statements and trading patterns makes me believe this was first and foremost a currency motivated move. In the US I believe the Fed is more motivated their concerns re excess demand than inflation. Nothing in the recent data suggest a real danger of an inflationary spike. I believe the Fed is much more concerned about the potential for 'excessive' capital spending. Without going into a lot of detail right now, a convincing arguement can be made that one of the biggest problems in Japan results from the very strong capital spending related to the equity spike in the 80s. This huge amount of excess capacity still sits like a weight on the Japanese economy. While we haven't seen anything like the Japanese capital spending boom of the 80s in this country I believe the Fed is very concerned about letting it get started. However saying that you are fighting demand is not something that would be politically popular. After all it is saying 'we are creating to many jobs and productive assets, we need to stop this'. The Fed would get a lot of heat from Congress. The high CPI number gave them the cover to use inflation as the bogeyman but I believe thier real concern is demand.

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