Can the Fed Fight Inflation with Words?

Following up on my post from earlier today about the pending Fed Meeting, by now most market watchers know that the Federal Reserve chose the path of least resistance: a 25 basis point interest rate cut.  Initially, the stock market fell when the news was released because the statement was seen as too hawkish toward inflation.  In particular, here's the segment of the Fed's announcement which bothered markets momentarily:

"Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation.  In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

"The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.  The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."

The thing is, it's far beyond time to risk a little economic growth in the name of containing inflation, as anyone who eats food or buys gasoline can attest.

Rather than "disappoint" markets by not cutting interest rates, the Fed pretty obviously chose to give the widely-expected 25 basis point cut while talking about inflation risks, hoping that the mere potential that its rate cutting campaign might end would be enough to contain inflationary pressure.

Unfortunately, the Fed is going to be disappointed.  It will take action, not words, to reign in rampant inflationary pressures.

It's awfully early to be handicapping what will happen at the next Fed meeting on December 11^th, but my suspicion is that the Fed will indeed hold rates steady; unfortunately, it will be because the dollar will have fallen to a point where Bernanke and company simply can't cut rates again.

As advisors to significant dollars in international equities markets, our business benefits greatly from a declining U.S. dollar; it's all of our day-to-day lives as Americans which suffer from its decline.

Sadly, "Helicopter Ben" is back, and he's making a mess of your savings, ladies and gentlemen.

www.deltaga.com

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