New Star forecasts that oil at $140 a barrel could thwart the expected second-half recovery in US growth.
Ward says that instead of cutting interest rates, the Fed should raise them to trigger a correction in commodity prices. Goldman Sachs’ commodity price index stabilised from the middle of 2006 as the Fed increased interest rates above 5 per cent and Ward claims the surge in commodity prices only began after the Fed started cutting rates aggressively last autumn.
He believes a tightening of Fed policy will be needed to burst the bubble of escalating commodity prices, just as he says it was an increase in Fed rates that burst the technology, media and telecoms bubble of the late 1990s.
Ward says: “The Fed has damaged the economy by buckling to the demands of Wall Street interest rate doves. A commitment to a stable dollar, backed up if necessary by policy tightening, would be the best route to a recovery.”