While it hasn't quite actually been made official yet by the Federal Reserve, I think its quite clear that they are now becoming more concerned about inflation than the economic recession. The recession, or downturn, whatever it actually ends up being, has been the main objective of their monetary policy movements in the past 9 months. It takes very little reading of the tea leaves to see why the Fed would be getting so concerned with inflation right now.
Crude oil has shot through $135 a barrel, and a $4 average price for unleaded gasoline in the United States is an absolute shoe-in. Every day we have a new economist or oil trader coming out with a new prediction of $150 oil, $200 oil, $300 oil. Oil certainly has the fundamentals on its side, but the recent trade has gotten very speculative, and it is getting out of control.
The problem is, it isn't just oil. Food prices are through the roof due to the jump in all the other commodity prices such as wheat and corn. A trip to the grocery store costs a lot more today than it did just a year ago. The average American family is really starting to feel the pain.
While the economic numbers may continue to point to a weakening of the overall economy, I do believe the Fed is making a wise decision in turning its eyes on inflation. If they don't try to keep inflation under control, this has the potential to be a very large and very long-term problem for the economy. One could argue that there has never been real inflation pressure on the everyday consumer as much as there is today. The Fed has lowered interest rates significantly to help the credit crisis and the overall economic slump, but now it must turn its priority toward keeping prices in check.
The Fed's "concern" with inflation is an absolute joke. All the talking heads on TV seem to think that by the Fed putting "strong" language in their recent statements, that that means they are serious about combating inflation. Unfortunately, in the real world, language (strong or otherwise) does not bring down the price of oil, food, or any other commodity or help to undo eight plus years of easy credit. I am not saying that the Fed wasn't backed into a corner and forced to go down their current route. But as long as the Fed continues to dance to the tune of Wall Street and help out the banks, they really couldn't give a you know what about what the average American is going through. The disconnect between Wall Street and Main Street is about a country wide. The Fed could have taken a cue from the European Central Bank and focused on price stability all along (which, curious enough, is in their mandate) and let the excesses of the system work themselves out.
Posted by: Brian | May 26, 2008 10:34 AM | Permalink to Comment