Over the weekend, Barron’s cover story titled “C’mon Ben!” made waves as it called for Bernanke to raise rates. The argument centers on adequately compensating savers and other investors in U.S. assets as well as “incipient inflation”. This argument is weak at best. Adequate compensation for creditors is meaningless if the economy plunges into a deflationary spiral. Then there is (or more appropriately, isn’t) inflation. Inflation is not yet a problem and won’t be until velocity picks up. We may see inflation scares, but ultimately, they should not materialize. For now, the liquidity provided by the Fed is finding its way into asset prices. Macro Man points this out well in describing the differences between economic and financial velocity. That said, while core prices are unlikely to pick up substantially, inflation may materialize indirectly through commodity prices, making the Fed’s job even more difficult. Back to the Barron’s piece, the author concludes by noting that if a resilient U.S. economy can’t tolerate 1% or 2% short rates, the country is in bad shape. That concluding statement essentially pulls the rug out from under the argument. With unemployment pushing 10%, and a “recovery” that is anything but resilient, the country can’t handle higher short rates. Further, as if it is not already abundantly clear, Bernanke is intent on avoiding deflation at all cost whether it is of the price level, asset price or wage variant and will not risk overly tight monetary policy.