Steady as she goes

The FED opted yesterday to keep interest rates at 2%, indicating that while inflation is a growing concern, it is still secondary to stimulating growth. Meanwhile, the ECB is getting even more hawkish on the issue, with Trichet signaling that they will likely raise rates by 0.25 points to 4.25%.

Essentially, the US and the EU are taking opposite bets on what's a bigger economic threat: recession or inflation. In a way this is par for the course: as an institution modeled on the Bundesbank, the ECB is much more inflation-adverse by design. But you can't help wonder if somebody's making a mistake.

That the dollar is still the world's primary reserve currency only complicates things. Countries pegged to the dollar cede their monetary autonomy to the FED and have to follow its decisions or get knocked off their peg. In China, where inflation is closer to 8%, low interest rates are probably not what you want.

Add to this the fact that lower interest rates are more likely to cause further dollar depreciation, and you've got some real problems. Especially when you need to import things like oil (black gold, Texas tea), where contracts are denominated in dollars. If dollars are worth less, it will drive up the price. 

Spooky, scary, indeed.