Saturday, August 18, 2007

Is the Fed no longer worried about inflation?

Some commentators are strongly suggesting that the Fed has abandoned its concern about inflation. Sorry, but it simply isn't true. The Fed is still very concerned about inflation and their decisions over the next few months will deeply reflect that ongoing concern.

The source of this misunderstanding by some commentators is simply the fact that the special inter-meeting FOMC statement on the current "crisis" did not include any mention of inflation. That is reading way to much into one statement. The FOMC used the words "the Federal Open Market Committee judges that the downside risks to growth have increased appreciably", but there is no rational reading of those words that would require concluding that the language excludes other considerations.

The special statement was focused on financial market conditions, tighter credit conditions, and the vague "increased uncertainty", and how these factors "have the potential to restrain economic growth going forward." Be very careful not to presume that "potential" means the same as "likely."

The FOMC says that the committee "judges that the downside risks to growth have increased appreciably", not in any way indicating that this is the only risk.

Simply put, given the importance that the Fed has given to "vigilence" on the inflation front, one would expect that they would make a serious note if they believed that they had finally tamed inflation. By now, we should all know that inflation is implicitly a concern of the Fed even if it isn't mentioned in every utterance.

It is important to note that the Fed did say "recent data suggest that the economy has continued to expand at a moderate pace", indicating that the Fed does not see any immediate certainty of of the kind of economic downturn that a number of commentators are strongly suggesting.

Granted, the statement is somewhat ambiguous, but ambiguity is not a valid rationale for making strong statements about the Fed abandoning anything.

The proper stance to take is to accept that we simply need to get a few more speeches from Fed officials before we can conclude firmly that the Fed considers inflation to be "solved."

In short, the Fed is still taking a tough stand on fighting inflation.

-- Jack Krupansky

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