Yesterday, the U.S. Federal Reserve Open Market Committee met to set interest rates — and it did what most expected, which is nothing. “Standing Pat” is the official term when the Fed neither raises nor reduces interest rates. Here’s the statement the FOMC issued yesterday after its meeting:
“Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation expectations have increased.” Old news, especially for those who regularly read this column.
In my many years of watching the Fed, I’ve learned one thing: They are slow to react. Remember all that talk by Bernanke, Paulson and even the President earlier this month about a stronger U.S. dollar being in the best interest of the country? Well, that talk certainly wasn’t translated into an interest-rate hike yesterday.
At the most, the Fed now is simply “talking” about inflation being a bigger problem in light of a bottoming-out economy. But I don’t believe the Fed is convinced inflation really is a big problem.
My question continues to be the same:
Aside from oil prices and food prices, what else is rising in price these days? We know housing prices are falling. The stock market is down about 10% since mid-May. Automobiles and consumer products are declining in price. (And if inflation was out of check as we read in most newspapers, wouldn’t the price of gold be over $1,000 an ounce?)
So, is all the worry about inflation justified?
Let’s answer this question with another question: If all the worry about inflation was justified, wouldn’t the Fed have raised interest rates at least a quarter point yesterday? Yes, it would have.
All the talk about inflation, for me, has become over-rated because it is restricted to two groups: oil and food. If oil prices fall 10% from their current level, I expect most of the articles we are reading in the daily newspapers about inflation will suddenly disappear.