The minutes of the April meeting of the Federal Reserve’s Federal Open Markets Committee (FOMC) were released yesterday. They reflected the Fed’s view that the economy would continue to weaken and contained amended projections of much higher inflation as well as slower growth.

All of the Fed’s weaker economic projections stopped just short of declaring that we are in or are headed into a recession. But the dubious use of core Consumer Price Index (CPI) inflation measures that exclude food and energy as opposed to the broader measure as the deflator in Gross Domestic Product (GDP) calculations is the difference between whether we are technically in a recession or not. So I guess those of us who do not eat or use energy are not in recession, the rest of us are.

We have commented here recently about the folly being perpetrated in some of the governmental reporting of statistics. The distortions have grown so obvious that the Consumer Price Index (CPI) for April reported a drop in the cost of energy based on seasonal adjustments. Add that to the continuing outrage of relying on the core number, which excludes food and energy.

While all of the major reports’ numbers can be challenged, the CPI is perhaps the worst offender as that number is used to adjust Gross Domestic Product and is the basis for cost of living adjustments in social security payments and often in private sector salary increases.

Cause and effect is always a tricky concept and that is most true when it comes to markets. With only two directions to go any explanation can seem valid. So when the Dow Jones Industrial Average dropped nearly 400 points on Friday there where many explanations out there.

The sharp increase in the unemployment rate, to 5.5% from 5% — when most expectations called for a minor increase to 5.1% — was obviously what got the bears rolling and the consensus is that the sharp increase in crude oil is what kept up the selling pressure.

I would suggest that Comments from European Central Bank (ECB) President Jean-Claude Trichet, suggesting that the ECB could soon raise interest rates to address rising inflation is what triggered dollar weakness and consequently the oil rally but it has already been determined that evil speculators are the only cause of higher oil prices. Isn’t it nice for “big Oil” and Opec that there is a new scapegoat on the block to point at.

Several headlines yesterday highlighted the Federal Reserve’s emphasis on inflation after announcing no policy change in the Fed Funds rate following its June FOMC meeting. But reports of the Fed’s inflation concerns appear overblown as there was no action attached to it.

Evidence of a significant elevation in inflation was right there for the Fed to see back in September when it chose to embark on an historically aggressive easing campaign. Just because it chose to ignore inflation or at least place it on the back burner to worry about on another day and deal with the more immediate concerns of a recession doesn’t mean it wasn’t there.

A couple of weeks ago following the passage of the Energy Markets Emergency Act we wrote a tongue in cheek blog regarding the legislation and commented that the fact that it was basically an empty gesture was its greatest attribute given that it did not include some of the draconian measures being contemplated by some Senators.

While purporting to fight market manipulation, some Senators have suggested basically creating rules—such as using margin—to manipulate the market. Creating uneven rules on margin as was suggested during one of these hearings to try and affect market activity is a manipulation regardless of its intent. We ended the blog half jokingly by suggesting that with the equity markets under such pressure that it would be ironic if Congress tried to manipulate activity in one market one way and in another—equities—in a different manner. We quipped, “It could happen.”

Yesterday the Securities and Exchange Commission (SEC) extended its emergency action restricting naked short selling of Freddie Mac, Fannie Mae and 17 investment banks.

The initial emergency action on July 15 pulled the market out of a downward spiral that had hit two-year lows. After a substantial recovery, nearly 900 points in the Dow Jones Industrial Average, the market turned south again, retracing the move by more than the notable 61.8% Fibonacci level. The extension spurred another impressive two-day rally.

But we have to question where this faith is coming from. Sure it helps to put a bottom below the investment banks but it is based on the notion that “there now exists a substantial threat of sudden and excessive fluctuations of securities prices generally and disruption in the functioning of the securities markets that could threaten fair and orderly markets” according to the SEC that described this as “unusual and extraordinary circumstances.”

Reading the minutes from a Federal Reserve Open Markets Committee (FOMC) meeting can be frustrating and downright painful. The committee literally has dozens of hands and keeps on looking at another.

A newswire story citing a minor shift towards concern over slow economic growth from inflation caused me to look at the release closely.

I guess it was there somewhere but darned if I could find it. It is odd that they would abandon their shift from inflation after only just discovering it despite it being apparent for quite some time. But as Economist John Williams noted in the July issue of Futures, “The Fed is not concerned with inflation. It is not concerned about the economy…its primary function is keeping the banking system solvent.”

Suspicion of government economic reports is at an all time high and given our government’s propensity towards happy news, and that we are in the midst of a political convention, traders must be looking at tomorrow’s unemployment report with a certain amount of trepidation.

That we are going into the number on the heels of a 344 point drop in the Dow Jones Industrial Average makes things more interesting. Did someone know something?

Initial unemployment claims for the week ending Aug. 30 jumped to 444,000, well above consensus estimates, contributed to negative sentiment. But tomorrow is the big one and given today’s move, a slightly better than expected report could cause quite a rally. As someone who followed these reports very closely, I can say that it is not that unusual for the unemployment report to come out completely counter to what initial claims showed. So it would not be proof of some conspiracy if tomorrow’s report is positive.

Who knew all the market needed was a sharp increase in unemployment to get going. The Dow Jones and S&P 500 indexes both ended the day in positive territory despite the unexpected jump in the unemployment rate to 6.1% from 5.7%.

But all is not rosy. The liberal advocacy group Campaign for America’s Future put out a release Friday noting that “the misery index” has risen to 11.7%, it highest level since 1991. You may recall that the index came into vogue during the 1970s and 1980s political campaigns. The index is a composite of the unemployment rate and inflation using the annual Consumer Price Index.

The press release got us thinking. We have chronicled in this space recently how the various methodologies to calculate economic reports by the Federal government have been altered to produce more positive numbers. In the July issue of Futures, we interviewed economist John Williams who keeps up the government’s economic statistics using the original methodology at his firm Shadow Government Statistics (SGS).