Last week the U.S. Federal Reserve moved one step closer to acknowledging
reality.
Unfortunately, it didn’t let that admission move it from a policy course
firmly guided by fantasy - meaning the central bank opted to stand pat on interest rates, despite
the clear escalation of inflationary pressures.
In the policy statement that accompanied that decision last week, Fed
Chairman Ben S. Bernanke and the other members of the interest-rate-setting
Federal Open Market Committee (FOMC) took an important step in noting that
inflationary concerns had taken hold in the country at large.
But as it asserted that it expects inflation to moderate this year and next,
the Fed gave no indication that these heightened expectations are gaining
traction within the FOMC itself. As a result - with Richard Fisher, president of
the Federal Reserve Bank of Dallas, casting the sole dissenting vote - the FOMC
signaled no likelihood that it was actually prepared to do something to fight a
problem that it doesn’t really seem to believe exists in the first place.
In fact, by indicating that it expects inflation to moderate, the Fed is
effectively saying that the elevated expectations are unwarranted. In other
words, Bernanke claims that despite the fact that so many people are carrying
umbrellas, he still believes it will be a sunny day. The takeaway from the
statement is that no rate hike is forthcoming.
The markets saw this position for what it really is - a capitulation to
inflation and to a weakening dollar.
