Today, the Federal Open Markets Committee (FOMC) decided to keep its target interest rate unchanged at 5.25%, as widely expected. The controversy was more over the supporting language of the decision.
The Fed emphasized that its predominant concern was inflation. Some on Wall Street hoped that the Fed might move to a more balanced position by also mentioning concern with the downside risks to the economy. When these hopes were dashed after the statement's release, the stock market dropped briefly before recovering.
The FOMC did acknowledge the recent volatility, tightened credit conditions, and the declining housing situation. It appears to be watching the situation carefully but sees no spread to the general economy. If the Fed had elaborated about any of these topics, it would have created the impression that the situation was deteriorating more than previously thought, and this would have been a negative for the market.
This Fed is making it clear that it stands ready to assist in a crisis but not to solve everyday problems, even if Wall Street experiences pain. It appears driven by the data. Currently, there is "solid growth in employment and incomes and a robust global economy." Therefore, the Fed sees no need to change.
Chairman Ben Bernanke is attempting to walk a fine line between inflation hawks and economic doves. It seems to be working so far. However, only time will show us if he is right.
Doug Roberts is the Founder and Chief Investment Strategist for FollowtheFed.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices.
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