The Federal Open Market Committee (FOMC) released the minutes of its recent meeting on August 5. The event itself was a bit of an anti-climax because of the comments by Fed Chairman Ben Bernanke at the recent Wyoming summit.
Everyone knew that although members of the Fed are quite concerned about inflation, they are even more concerned about the deteriorating economic situation. This was clearly indicated in comments made at the Jackson Hole meeting. In addition, as I mentioned in my earlier analysis, the decisions by Fed Governors Plosser and Stern to vote to leave rates unchanged instead of dissenting indicates the gravity of the economic and monetary problems facing the United States. This was almost a complete reversal of the recent hawkish comments by both individuals.
The FOMC minutes actually give us insight into the thinking of the Fed. The Fed is very concerned about the fragile nature of the economy. It clearly believes that a rise in interest rates prematurely could damage the already battered credit situation.
However, the Fed is concerned about the inflation situation. It is particularly concerned that inflation could become embedded in expectations. This phenomenon is much more difficult to control once it begins.
It believes that the weak economic situation, combined with the recent decline in oil prices, may help to resolve this dilemma in the coming months. It may require a rise in interest rates if this does not occur.
However, because of the weak economic situation, the Fed is implying that such an event will not take place anytime in the near future. The minutes also indicate that it "did not see the current stance of policy as particularly accommodative" and thus sees no reason to raise rates prematurely.
The dilemma between growth and inflation is likely to persist for some time. With oil prices declining, the Fed might be able to mitigate some of the problem with inflationary expectations by raising rates. However, this could also change a painful slowdown into a severe recession. In this case, the cure to the inflation problem may be worse than the disease.
Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices, and is the author of Follow the Fed® to Investment Success: The Effortless Strategy for Beating Wall Street (www.FollowtheFedtheBook.com ). He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
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