Fed Serious About Inflation?

The answer is yes. Is the Fed serious about growth, or asked another way, does the Fed want to avoid a recession? The answer is yes. Did today’s Fed statement appeal to both camps? Answer = yes!The Fed is walking a tightrope right now. The economy is teetering on the brink of a recession, some financial institutions are close to insolvency, unemployment is ratcheting higher, consumer confidence is plummeting, and housing prices are crashing. Those are the ingredients not only for a recession, but a depression. On the flip side, the cost of food and energy is skyrocketing, and more and more companies are passing on the increased costs to the end user by way of price increases. Heck, if you combine the two scenarios, you’d suggest that we were in a stagflationary environment. It would be hard to argue the point.

That said, bond king Bill Gross was interviewed on CNBC today shortly after the Fed release and he thought it was a well-balanced statement regarding the risk of inflation against the risk of an economic slowdown. He predicted an unchanged fed funds rate for the duration of the year as “financial de-leveraging” continued all the while the risks to the economy were still quite high. He theorized that the U.S. slowdown would probably impact commodity prices duly and it would be a mistake for the fed to raise now, only to have to lower again later this year if the economy seized up. He did say the orthodox view is that eventually demand destruction (like we are having with gasoline) and the typical counter-balances and unwindings an economy has due to traditional slowdowns or recessions should ultimately impact high commodity prices. He stated how unclear a hike in interest rates would have directly on oil prices. Finally, he considered the Fed’s discussion about inflation as “jawboning” in an effort to keep inflation at bay since their policy tools could ultimately be ineffective. He felt the Fed’s current priority of keeping the U.S. economy from going off a cliff was tantamount.

Bottom line; the second half of the year is going to be a doozey, and don’t forget to throw in the November elections on top of it too!

Good Luck.