The Federal Reserve Bank released the minutes of its January Federal Open Markets Committee (FOMC) meeting and it turns out that the Fed has not completely forgotten about the risk of inflation. The minutes state, “Members were also mindful of the need for policy to promote price stability, and some noted that, when prospects for growth had improved, a reversal of a portion of the recent easing actions, possibly even a rapid reversal, might be appropriate.”
The “rapid reversal” line is particularly onerous: translated, “we really mean it this time. Really.”
This isn’t much of an acknowledgement given that the core inflation numbers — numbers many analysts will tell you are badly skewed to dampen what already could be 1970s style inflation —are currently well above the Fed’s target 2% rate. But the problem of such cautionary rhetoric from the Fed is that over the past year it has rapidly fallen by the wayside as soon as equity markets sell off.
The Fed has continually referred to turmoil in equity markets as support for the easing policy begun in August. And while the markets have been frothy and experienced a terrible January, the Dow hit its all time high after this easing campaign had begun. It is as if the only acceptable mode is a bull equity market and any time it slips out of sight of its all time high the Fed must come to the rescue.
While the current justification of housing and credit issues were cited for supporting the most recent move, the minutes revealed the following cautions involving inflation: “the pass-through of recent increases in energy and commodity prices as well as of past dollar depreciation to consumer prices could be greater than expected. In addition, participants recognized a risk that inflation expectations could become less firmly anchored if the current elevated rates of inflation persisted for longer than anticipated or if the recent substantial easing in monetary policy was misinterpreted as reflecting less resolve among Committee members to maintain low and stable inflation.”
The last part is particularly amusing. The Fed is worried about elevated inflation levels because the current elevated inflation levels may persist. That is a legitimate fear given that the Fed is infusing more dollars and easing into an economy with elevated inflation. And they are worried that people may think they are not serious about combating inflation because they currently do not appear to be serious about combating inflation.
The market appears to be onto their game as the cash Dow settled near the top of its range after a brief sell off following the announcement of the minutes. This on the second consecutive day crude oil settled above $100.
