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Fed Must Get Back On Message - by Larry Kudlow

U.S. Treasury undersecretary Tim Adams told me on CNBC Monday night that he does not believe trade deficits have any strong impact on currency rates. Nor are they interested in "beggar-thy-neighbor" currency policies.

From this, I take away the thought that the Treasury may not really be trying to manipulate the dollar lower. Using a thirty nation index for the dollar, there really is not much decline at all following a massive run-up during 1991-2002.

Given the U.S. investment boom, as illustrated by yesterday's strong industrial production numbers, I would be a dollar buyer, not a seller.

Here's a thought for you inflationists out there: The business and investment boom sparked by lower tax rates three years ago will, over time, burn off any excess monetary calories. Lower tax rates are always associated with lower inflation. Lower tax rates raise the demand for money.

Ben Bernanke needs to do two things right now to calm inflation worries. It's real simple: First, get back on message by repeating his earlier mantra of the need for a numerical inflation target. This would reestablish the price rule.

Second, the Fed should keep raising their target rate in quarter point intervals, until the breakeven inflation TIPS spread drops down about 25 or 30 more basis points.

Fed policies have slowed the monetary base. Keep up this campaign.