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Tim Geithner has raised the time-honored Washington tradition of kidding yourself to a whole new level.
You may worry about the implications of $4 gasoline on an economy that hasn't exactly been going gangbusters as it is. It's no stretch to say the recent surge in commodity prices could ground an anemic recovery in consumer spending.
Rocket's red glare
But Geithner fairly throws back his head and laughs in the face of this scourge. Why? Because unlike so many others, he has faith in the Fed.
"Central banks have had a lot of experience in managing those things," the Treasury secretary said of commodity price spikes at a Washington event Wednesday. "It's not rocket science."
It's not, but that's beside the point. Smart as it is, there is almost nothing the Fed can do to clean up the oil mess, even if it were inclined to act – which it almost certainly is not.
That means the inflationary headwinds against the weak U.S. recovery aren't about to let up.
This week's oil price spike, which took the cost of a barrel above $100 in New York and to $120 or so in London, is being driven less by strong global demand and more by a squeeze on the flow of oil from the Middle East.
Ben Bernanke is surely a resourceful guy. But there is not much a central banker can do to restore the flow of oil from Libya or boost output in Saudi Arabia.
Of course, there is a case to be made that the Fed could trim underlying demand for oil and other goods by tightening policy. Strong demand is a large part of what took oil to the $80 or $90 or so a barrel that it had fetched for much of the past year till the Mideast unrest.
But the Fed could do so only by prompting an economic slowdown – which is exactly the outcome Ben Bernanke & Co. are trying to avoid with unemployment still at 9%.
And as Geithner of all people should know, just because the subject matter is easy doesn't mean the Fed is apt to ace the test. His former employer has proved that over and over during the past decade.
Most glaringly, the Fed botched simple interest rate math in 2003 and 2004, keeping rates so low for so long that it managed to inflate a massive credit bubble that popped a few years later with devastating consequences.
Lifting off
The Fed also booted the seemingly simple question of "Should you lift a finger to prevent massive mortgage fraud," with Alan Greenspan cleverly filling in the box next to "No, the market is already doing that, thanks very much."
So the Fed's report card isn't exactly pristine to begin with. And the test the central bank faces now is a lot tougher than the ones Greenspan & Co. bombed seven or eight years ago.
In short, Bernanke & Co. can keep doing what they are doing and hope the momentum in commodity prices peters out. Or they can pull back from asset purchases and risk pulling the rug out from under the domestic recovery. Guess which one they're going to pick.
Just in case Bernanke hasn't been clear enough in his dedication to holding down rates, a 2004 speech makes it clear that the Fed chief believes there is no rush to tighten monetary policy just because commodity prices are going nuts.
If inflation has recently been on the low side of the desirable range, and the available evidence suggests that inflation expectations are likewise low and firmly anchored, then less urgency is required in responding to the inflation threat posed by higher oil prices.
So no, this isn't rocket science. But saying it doesn't make getting the economy off the launching pad any easier.
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