All across the street today there was a heated discussion going on of whether the Federal Reserve is to blame for the recent market action and today's steep losses in all the major indices. Many out there were saying that by holding rates steady yesterday the Fed was abandoning its strong dollar and inflation fighting policy stance. Larry Kudlow, who has a nightly show on CNBC, made his opinion known tonight. Kudlow said that he believes today's action was certainly because of the Fed and that oil and gold prices today back that up. He is certainly not alone in his thoughts, as many on the street believe that the Fed has dropped the ball and that prices are going to get much worse in a hurry. 
Are those who believe the Fed is being too soft on inflation and the dollar spot on, or are they off the mark? This is a very difficult question which has more than one logical answer.
In my opinion inflation is a VERY real threat to our economy right now. Oil prices are taking off on a daily basis, and prices at the grocery aren't far at all behind. The dollar is as weak as it has been in quite some time. From this statement one would think that I believe the Fed was way off base, but in reality I'm not sure that is the case quite yet.
The thing that some are conveniently leaving out is the fact that the economy seems doomed for a recession, and it could be a deep one. The consumer confidence numbers are absolutely horrendous and it is hard to believe that show up in consumer spending in the next few months. The labor market is getting much tighter, and as we have seen in the past when the labor market breaks the economy does so in a big way.
The bottom line is this; the Federal Reserve is in an extremely tough position right now. Sure they could have talked a little more tough on inflation in their statement yesterday, but talk is cheap and it couldn't have made any real difference in the economy. The Fed is weighing the risks of the economy falling into a deep recession and the risks of letting inflation taking over. It seems sensible to hold things steady for the time being.
As soon as the signs become evident that the economy can withstand the credit crunch and possible consumer slowdown, an aggressive move higher in rates should be the move. When the Dow is down over 350 points as it was today it is easy to blame the Fed and say if they had moved interest rates higher then this wouldn't have happened, but the Fed is in a tough position and has done the right thing thus far. The next move in interest rates is higher, but the Fed is right to hold on, for now!
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