Larry Kudlow

Perhaps I was right to give Treasury man Tim Geithner the benefit of the doubt over his statements last week hinting at King Dollar protection. Perhaps.

Today’s big news on the Fed’s QE2 money-creating policy -- due out the day after the election -- suggests a minimal Fed pump priming. Call it QE Lite.

This comes from Jon Hilsenrath’s Fed-leak story in the Wall Street Journal. The next round of monetary stimulus won’t be anything near $1 trillion to $2 trillion, but more like “a few hundred billion dollars over several months.”

As a result of this story, the dollar rose half a percent across-the-board, and gold is now about $80 below its recent peak.

Now, don’t get me wrong. I don’t want QE anything. There’s plenty of unused liquidity sloshing around the system. And a stable King Dollar is the best medicine for economic growth and price stability.

What will trigger a stronger economy with job creation is the $100 billion budget cut now being discussed by Republicans in the House along with a freeze on the Bush tax rates. That’s pro-growth fiscal policy. Join it with pro-growth currency stability.

But back to the Fed and Treasury. A minimalist Fed stimulus is certainly better than a massive new-dollar creation that would totally sink the greenback and lead to a much higher inflation tax far more quickly than almost all commentators think.

And here’s an interesting point. Maybe Bernanke & Co. has been watching inflation-sensitive market prices, including gold, commodities, the negative real yield on inflation-protected bonds, and even the run-up in oil. Perhaps the Fed is at least cognizant of the risks of a plunging dollar.

Even longer-term bond rates have been backing up. So it’s not inconceivable that the Treasury and Fed are watching market-price indicators, including the dollar. And perhaps that accounts for the Fed leak of a minimalist action rather than a dollar-destroying maximum action.

And as Hilsenrath points out, there are a lot of doubters inside the Fed. The presidents of the reserve banks in Minneapolis, Dallas, Philadelphia, and Kansas City are leading the skeptical charge. Good for them.

In any event, since Geithner came out with his statement that no country can devalue its way to prosperity, and that the dollar is low enough against the euro and yen, the greenback has at least temporarily stabilized and gold prices have dropped.

The stock market is trying to figure all this out, and it got slammed earlier this morning. But the Dow came back to close only 43 points down.


Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.


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