Wikinvest Wire

Fed still expecting inflation to moderate

Tuesday, August 05, 2008

As expected, the Federal Reserve left short-term interest rates at the freakishly low level of just 2.0 percent earlier today (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 is 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?

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