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As mainstream economists, the Fed knows it took a very large risk when it cut aggressively, hoping its forecasts for ‘moderating inflation’ would play out, and knowing the following would happen if ‘inflation’ accelerated.
by Kim-Mai Cutler
(Bloomberg) Former U.K. Chancellor of the Exchequer Nigel Lawson said Federal Reserve Chairman Ben S. Bernanke may be “regretting” the fastest pace of U.S. interest-rate cuts since 1984 as global inflation accelerates.
The Fed reduced its benchmark rate by 3.25 percentage points to 2 percent between September and April 30 to stave off a recession following the collapse of the U.S. subprime-mortgage market. The Bank of England, also facing a slowdown, cut its key rate by 0.75 percentage point to 5 percent. The European Central Bank left rates unchanged at 4 percent for a year and signaled this month it may raise them in July.
“The Bank of England has been very cautious and careful and it has been much closer to the views of the European Central Bank,” Lawson, 76, who was finance minister from 1983 to 1989 under former Prime Minister Margaret Thatcher, said in a telephone interview. “It has not gone conspicuously the way of the Fed, where I suspect that Mr. Bernanke’s now regretting it.”
U.S. consumer prices rose 0.6 percent in May, the most since November, the Labor Department said June 13. Inflation in the euro area accelerated last month to a 3.7 percent annual rate, the fastest since June 1992, the European Union reported June 16.
Inflation caused by rising commodity prices is the biggest threat to the world economy, eclipsing concern about the seizure in the credit markets, finance ministers from the Group of Eight nations said June 14. The World Bank said on June 10 that global economic growth will probably slow to 2.7 percent this year from 3.7 percent in 2007.
Rising food prices and a “speculative bubble” in oil markets will prompt central banks to lift rates, leading to a “growth recession” where the rate of expansion is lower than historical trends, Lawson said in the interview.
Crude oil rose 95 percent from a year ago and traded at an all-time high of $139.89 a barrel in New York June 16. Corn for December delivery also traded at a record $7.915 in Chicago.
“Most of the central banks are very, very clear on just how dangerous it is to let inflationary expectations get out of hand,” he said.
Traders see a 48 percent chance the Fed will raise its target rate for overnight bank loans from 2 percent as early as August, up from 4.1 percent odds a month ago, futures contracts on the Chicago Board of Trade show. The chances of an increase in October are 99 percent, the contracts show.
Michelle Smith, a Fed spokeswoman in Washington, declined to comment on Lawson’s remarks.
The slowdown in the U.K. is going to last “longer than most people expect,” while remaining “shallow,” Lawson said. The economy, the second-largest in Europe, grew 0.4 percent in the first quarter, its weakest pace since 2005, as higher credit costs hurt construction and business services slowed, according to the Office for National Statistics.
“This is the hangover after the binge,” Lawson said. “It’s going to be very, very difficult for the next two to three years for the global economy.”
The U.K. won’t adopt the euro in place of the pound as a global slowdown heightens tensions between members of the 27- nation European Union, Lawson said. Ireland vetoed the bloc’s new government treaty June 13, sinking an agreement that needed ratification by all EU countries.
“There are going to be considerable strains within the euro area,” Lawson said. “There are going to be a number of countries that found the single currency satisfactory during the benign period, that are now going to hurt much more under these difficult conditions.”