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.

The Philadelphia Fed Survey of Manufacturing in the tri-state area came in at -12.7. This was an improvement from the prior month's reading of -16.3, and slightly ahead of expectations. Initial unemployment claims were 432,000, which was also an improvement from the prior week's reading of 445,000, and better than expected.

Despite these improvements, these numbers are still quite negative. We may be in the process of forming a short-term bottom. Much of this will depend upon what happens to oil prices. If oil prices stabilize or continue to drop in the near future, this will offer some much needed relief to our consumer-driven economy. However, if the recent drop in oil is only a minor correction, the economic news will get worse.

• Even if oil stabilizes and if the economy starts to form a bottom, I do not believe that we will experience a substantial rebound. There are too many economic pressures which will not be resolved overnight:
  The housing crisis is very similar to the one experienced in the late 1980s and early 1990s. This took a decade to resolve.
• The current banking and credit crisis also resembles the Savings and Loan debacle of that earlier era. This eventually required massive intervention by the Federal government in the form of the Resolution Trust Corporation (RTC) to repair the financial system.

Those people expecting a quick recovery like 1998 will be sorely disappointed.

Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, and is the author of Follow the Fed® to Investment Success: The Effortless Strategy for Beating Wall Street. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.

There was a double play in economic reports this morning, and the news was not good. CPI and Initial Jobless Claims both came in higher than expected. Equity futures turned negative across the board after the news was released.

CPI was expected to come in at 0.4% but came in at 0.8% for July. This was still less than the 1.1% number for June. The problem is that Core CPI was 0.3%, ahead of the 0.2% that was expected. This was the same as the 0.3% reported for June and indicates that inflation is not limited only to oil and is working its way into the system.

There was no relief on the employment front either. Initial jobless claims for the week came in at 450,000, which were ahead of expectations. This was down slightly from the prior week but still indicates an extremely weak employment situation.

The focus now shifts to oil, which has recently experienced a substantial decline from its recent peak price. If oil prices continue to decrease, or at least stabilize at this lower price, it takes pressure of the Federal Reserve to raise interest rates. The Fed realizes that the U.S. economy is far too fragile to raise rates. As long as oil prices remain tame, the Fed can minimize the recent CPI numbers and claim inflationary pressures are easing.

However, if oil rallies again, the Fed is in a very uncomfortable position. In addition, a rise in oil prices would not only increase inflationary pressures but also weaken an already battered consumer. For these reasons, the focus is now on oil!

Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, and is the author of Follow the Fed® to Investment Success: The Effortless Strategy for Beating Wall Street. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.

The Federal Open Market Committee issued its decision to leave interest rates at 2%. This was as expected. However, the statement was much more dovish than expected. Language in the previous statement indicating that downside risks to growth "appear to have diminished somewhat" was deleted, and the focus clearly remained on the economic situation, although inflation risks continue to be acknowledged.

The U.S. equity markets rallied prior to the statement being released and continued after the decision was issued. Oil prices also continued their retreat.

The dovish nature of the decision was indicated by the fact that there was only one member voting for an increase. As many as three members were expected to vote for an increase. Despite the recent hawkish statements, all members voted to maintain the 2% level.

This confirms what I have said in recent posts that hawkish talk does not necessarily translate into hawkish action. As I have said in my book, Follow the Fed to Investment Success, "watch what the Fed does not what it says."

The economy is still far too weak for the Fed to begin raising rates.

Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, and is the author of Follow the Fed® to Investment Success: The Effortless Strategy for Beating Wall Street. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.

The U.S. Bureau of Labor Statistics released the July Employment Report -- it was a mixed bag. Wall Street, concerned that the report would be much worse than expected, promptly breathed a sigh of relief with equity futures rallying after the release.

July nonfarm payroll employment was down by 51,000, which was less than expected. In addition, June unemployment was revised upward from -62,000 to -51,000. However, the unemployment rate was 5.7%, rising from 5.5% and was higher than expected. Hourly earnings rose by 0.3%, which was in line with expectations. Job losses were across the board, with the exception of job increases in healthcare and mining.

There was no real indication of any improvement in the economy. Why then did Wall Street react so positively? There is a huge fear that the economy is about to crash into a deep recession. This report gave at least some short-term comfort that the economy, although deteriorating, is muddling along.

The Federal Reserve Bank of Kansas City released its Beige Book Report detailing economic activity among the twelve Federal Reserve Districts across the country. The pace of economic activity was quite sluggish throughout much of the country. At the same time, there have been hawkish comments recently by several Fed governors. This leads us to the question of the possibility of a Fed rate increase on the horizon.

However, one must remember that hawkish talk is quite different from hawkish action. As I have said in my book, Follow the Fed to Investment Success, "watch what the Fed does not what it says."

The Fed has given no indication that an imminent raise in interest rates is forthcoming. There have simply been hawkish comments, which are an incredibly inexpensive means of maintaining its inflation-fighting credentials. However, every time market turmoil arises, the Fed adopts a more conciliatory tone.

During the recent testimony by Fed Chairman Ben Bernanke, Treasury Secretary Hank Paulson and SEC Chairman Christopher Cox, it has become increasingly clear that the Federal Reserve will be forced at least in the near term to extend a financial lifeline to any and all U.S. financial entities that are too big to fail. This refers to entities whose failure cold endanger the U.S. economy and in some cases the global financial markets.

I have learned during my investment career to watch what the Fed does much more than what it says. This has been demonstrated by Chairman Bernanke's extension of the discount window to Fannie Mae and Freddie Mac in recent days despite initial indications by Secretary Paulson to the contrary. Hawkish talk remains just that, not action.

The discount window was initially intended only for regulated banks to prevent a meltdown of the financial system from bank failures. In return for this financial insurance, banks are regulated, including the charging of fees. One can debate the alternatives to such an arrangement. However, this regulatory framework will probably be with us for the foreseeable future.

The Federal Open Market Committee issued its decision on interest rates Wednesday. It kept rates unchanged as expected but increased the hawkishness of the accompanying statement. It maintained its credentials on combating inflation but was careful not to cause any trauma to the financial markets that would require reversing this position. If this were to occur, the Fed would lose credibility.

The Fed wants to maintain its credentials on inflation control. This is necessary for it to protect the dollar from an uncontrolled spiral downward and an increase in core inflation. However, there is very little that the Fed can do to limit total inflation in the short term. The current inflation is really being primarily driven by the rise in oil prices. This is being caused primarily by the increase in demand in emerging markets, such as China and India. Fed policy has little effect on this. Oil prices rose throughout the last Fed tightening cycle despite the rise in the yield on short-term Treasury Bills.

Oil actually began its rise as the Fed began to increase interest rates in 2004. Prices doubled as the Fed substantially tightened monetary policy. Europe also has some of the same inflation issues that we face despite the refusal of the European Central Bank (ECB) to lower rates.

Given that fear is ruling the equity markets these days, it is easy to lose sight of the basic principles behind investment success. Early this week, once again, all eyes will be on the Federal Reserve, which is expected to keep rates unchanged. I agree with the consensus and think the Fed will keep rates on hold and maintain its current "loose" monetary policy, which makes this a good time for investors to emphasize small-cap stocks.

But before I explain a bit more about how I come to such conclusions, let's take a step back and think about how the average individual investor can really build wealth by investing in the stock market.

The most powerful tool is the law of compound interest. Einstein once called it the eighth wonder of the modern world. Remember that $10,000 invested at the S&P 500's historical 10% rate of return can make you a millionaire if allowed to grow over a long period of time. Maintaining a long-term focus is the real advantage that individual investors have over the Wall Street institutions that are primarily focused on short-term performance.

The June Philadelphia Fed Manufacturing Index came in at -17.1 which was substantially below the -10.0 number forecasted and the -15.6 number from the previous month. This number seems to overshadow the better-than-expected Leading Indicators number of 0.1% released from the Conference board and the Initial Claims number of 381,000, which was better than previous number of 386, 000.

These numbers indicate that even though the country may be able to avoid entering a recession this year, the economy is still in a very fragile state. It may be stabilizing but shows no indication of any major improvement.

The housing downturn will continue to act as a major overhang on the economy. High oil prices continue to act as a tax on the consumer in the short term.

Although the Federal Reserve will probably not lower interest rates again in the near future unless a crisis occurs, the economic numbers above indicate that it is no position to raise rates in the near future despite inflationary pressures. The risk of sending the economy into a recession is too great. In addition, any rate increases unless they were quite substantial are unlikely to cure inflation.

In the battle between inflation and the economy, it's still the economy that rules!

Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, and is the author of Follow the Fed ® to Investment Success: the Effortless Strategy for Beating Wall. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.

Yesterday, Fed Chairman Ben Bernanke gave a speech at the Federal Reserve Bank of Boston's 52nd Annual Economic Conference in Chatham, Massachusetts. In his speech, he said, "The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation."

The equity market dropped this morning as a result. Many traders interpreted these comments quite hawkishly, assuming that the Chairman was implying that interest rates may be raised as early as the end of this year. But as I have stated previously in my book, Follow the Fed to Investment Success, "Watch what the Fed does, not what it says."

This speech reminds me of the famous "irrational exuberance" speech by then Chairman Alan Greenspan in late 1996. Greenspan said that "irrational exuberance" had caused the equity markets to reach unsustainably high levels. Many then interpreted these comments quite hawkishly and assumed that the Fed would be raising rates shortly.

However, the Fed did not raise rates until several years later. Economic events, such as the debt crisis in the emerging markets and Russia, prevented the Fed from taking action, and the U.S. equity markets continued to rise. The bear market in the S&P 500 finally did occur in 2000, almost five years later.

Recently we have heard hawkish comments from Fed chairman Ben Bernanke. He has stated that interest rates will probably not be lowered any further and that inflation is now a major concern for the Federal Reserve.

The market has absorbed these comments with the dollar strengthening, and the stock market rising. Some are now even forecasting that the Fed will begin raising interest rates as early as the end of this year.

What should investors take from these comments? What has happened to Gentle Ben, that individual who seemed to be the advocate of a loose monetary policy in order to cushion the economic downturn?

In my book Follow the Fed to Investment Success, I have stated, "Watch what the Fed does, not what it says." Despite the hawkish comments from the Fed chairman, he has given no indication that he intends to raise interest rates in the near future. On the contrary, he made it very clear that this is not his intention. As today's employment report and the recent housing data indicates, there is still tremendous negative pressure on the economy which prevents any near-term tightening.

Then, why the hawkish comments? Despite the negative outlook, the recent economic data has not been as bad as expected. It appears that a recession will be avoided this year. The fiscal stimulus from the rebates is starting to be felt. There is very little the Fed can do to prevent inflation, but the comments do help to put a lid on inflationary expectations. This is what the Fed truly fears. These comments are an inexpensive way to combat core inflation with little cost.

First Quarter GDP was revised to 0.9% up from the initial estimate of 0.6%. This was also up from the fourth-quarter GDP number of 0.6%. The increase was largely due to increased export growth with consumer spending up but quite anemic.

Initial jobless claims came in at 372,000 which were up from 368,000 from the prior week. However, this was still well below the 400,000 number often mentioned as associated with recessions.

These numbers indicate that it is likely that the U.S. economy will avoid a recession this year. The monetary easing from the Federal Reserve seems to be cushioning the downturn with businesses and the consumer. We are also seeing the positive aspect of a lower dollar with increased export growth. The fiscal stimulus will also be kicking in the economy as the rebate checks arrive in the mail.

Does this mean that the economy will start to rally? Not likely. The housing downturn continues and will act as a break on consumer spending. This has no quick fix and will take time to repair itself. The last housing crisis in the late 1980s and early 1990s took several years to be resolved. This time will not be any quicker.

The minutes of the recent meeting of the Federal Open Market Committee (FOMC) were released today. It indicated that the decision to cut the Federal Funds Rate and the Discount Rate at the last meeting on April 30 was a "close call." This may indicate a desire by the Fed to pause any future decreases in these interest rate targets. However, the minutes still seem to leave open the possibility of future interest rate cuts if necessary.

The FOMC minutes seem to indicate bad news across the board. On the economic front, the Fed lowered its growth forecast and increased its forecast for unemployment. However, the unemployment rate still is not forecast to increase to levels associated with prior severe recessions.

The Fed also predicts inflationary pressures will continue for the near future. This will also put increasing pressure on "core inflation" which excludes food and oil and which is the Fed's preferred measure. However, the Fed does forecast that core inflation will eventually moderate.

What does this mean for the investor? This means that the Fed is trying to walk a very fine line. It is trying to balance the delicate economic situation with need to maintain credibility on inflationary pressures.

Former Fed Chairman Paul Volcker gave testimony today before a Joint Economic Committee of Congress. He addressed the current financial and economic environment and the role of the Federal Reserve.

He discussed how the financial market environment has changed considerably since his tenure as Fed Chairman in the early and mid 1980's. He pointed out that financial institutions like investment banks and hedge funds, whose failure can have tremendous effects on the financial system, are lightly regulated. "Systemically important investment-banking institutions should be regulated and supervised" in a similar manner to commercial banks.

Chairman Volcker stressed the need to update the entire regulatory framework, saying "It's not simply a matter of inexperience or technical failures." He also discussed the need to update regulations on a global basis because of the increasing coordination between world central banks.