The Fed Is Still Expecting Inflation to Moderate

As expected, the Federal Reserve left short-term interest rates at the freakishly low level of just 2.0 percent earlier yesterday (that's minus 3.0 percent in real terms), noting once again that they expected inflation to moderate.

Why they would expect inflation to moderate when real interest rates are firmly in negative territory is a complete mystery, but it doesn't stop them from saying so. This makes 13 out of the last 20 FOMC meetings, going back more than two years, where the policy committee either expected inflation to moderate or said that inflation was likely to moderate.

You'd think that inflation would have moderated by now.

[A complete summary of the "inflation expectations" of the Bernanke Fed through April of this year can be found here - note that they wisely transitioned from "likely to moderate" to "expected to moderate" in late-2007.]

Below are the last two policy statements showing that little has changed in the last six weeks.

Federal Reserve Bank of Dallas President Richard ("ninth inning") Fisher was the lone dissenting vote, favoring a rate increase for the fifth time this year.

Naturally, this kicked off one of the strongest stock market rallies in months and sent commodity prices tumbling.

That all makes sense, doesn't it?

Negative real interest rates with no expectation of returning them anywhere close to positive territory in the foreseeable future and the perpetual expectation of lower inflation that just never seems to arrive.

Sell commodities, buy stocks?

Comments

[CLH:]

We are in a deflationary environment. The so called inflation is due to energy and food which are correcting now. Look at the dollar (up strongly) and gold (down strongly).

The Fed is right. And the market thinks so too.

2008 Aug 06 08:04 AM

[advanced econ:]

The Fed is right? The Fed wouldn't know right if it walked up and punched it in the nose, which is what it deserves.
A deflation would mean the dollar had strengthened to parity or better with the Euro and a gold price of 450 or so would confirm it.
We are a long way from a deflation.

2008 Aug 06 09:29 AM

[JasonC:]

Yes the Fed is right. No the change in the exchange value of money isn't measured from a time 5 years ago when time starts because that is as far as some person can remember.

As for the article itself, if the writer thinks rates are too low he should go borrow a lot of money. Just jawing does nothing for anyone. The offer is there for a reason. Use it.

2008 Aug 06 09:57 AM

[Gaucho:]

Inflation when measured realistically is 10% or greater. This is accelerating. See web page shadow statistics

The FED lent out 350 billion in last month to the banks! This will continue for at least 6 more months. Plus the money they have already lent out. Plus the FDIC 500 billion expected losses plus Freddi and Fannie PLUS more money directly to the consumer plus the existing federal deficits PLUS PLUS PLUS = PLUS PLUS PLUS inflation

2008 Aug 06 10:34 AM

[dingojoe:]

If you can borrow from the Fed rates are low. If you have to borrow from a bank or other entity in the free market, rates aren't so low and fees and other terms make the credit environment pretty tough.

In many ways it's not much different than all the tricks the airlines are resorting to in order to compensate for high oil, except in the banks and other financials they are trying to compensate for the era of high stupidity.

2008 Aug 06 11:58 AM

[DaveW:]

The broad sell-off in commodities will prove the Fed right by bringing inflation down....for a time...

2008 Aug 06 12:25 PM

[User 232038:]

Everything I buy in the St. Louis area for example bread,lunch meat,tires,auto mechanic diagnostic fees,pizzas,peanut butter,auto parts have all went up in price at least 8-9% in just the last few months. Utility bills in the midwest have sprouted energy access charges in addition to the actual amount of natural gas water or electricity used. So inflation is raging in everything consumers have to pay for ..and few consumers that I know are getting pay raises over 2-3%. In any RATIONAL era short term cd rates would be at least 7% and the long treasury would be closer to 8-9% to compensate investors for inflation risk.

2008 Aug 06 09:33 PM