Good News from the Fed

The papers all have the same story. The Federal Reserve won't increase rates in the next go-around. Bernanke and his colleagues should be applauded, even though producer prices rose fast as reported this morning. Note that when you delete energy and food costs, the core rate rose modestly again.

The business establishment is increasingly arguing that inflation must be stopped, even given the threat that it would cause of deeper recession and more lost jobs. Business prefers low inflation to lots of jobs, of course.

Make no mistake, however, this is a difficult policy environment. If bond traders believe inflation will go up, they will send long interest rates and therefore mortgage rates up. That, too, can lead to a worsening of the crisis.

But the more immediate concern right now is that recession, lower wages and lost jobs may lead to further loan problems and more losses at banks -- and to a deep downward spiral in economic activity. Bernanke has his priorities right.

On the other hand, the European Central Bank, long too tight and obsessed with low inflation rates, wants to jerk rates up soon. There must be serious if polite battle going on between Washington and the ECB. A rise in rates there will weaken the dollar further. It would be good to get some coordination. My bet -- and hope -- is that Bernanke's Fed will talk Trichet's ECB into keeping the hikes to a minimum.

On the other hand, oil and food inflation, plus the over-borrowed consumer, will mean a slower economic recovery once we get past this slump in a year or so (the good scenario) . Then the Fed will raise rates as will the ECB. And it will probably be appropriate.

Bernanke's a smart guy. Of course, as someone told me, you also need a little luck. We shall see.