The Federal Reserve yesterday left no doubt that it’s worried about inflation. Not worried enough to raise interest rates, but worried nonetheless.
Announcing that it would keep Fed funds at 5.25%, the FOMC advised that the “predominant policy concern remains the risk that inflation will fail to moderate as expected.” True, the central bank believes otherwise, predicting that inflation pressures appear “likely to moderate.” But it’s sleeping with one policy eye open just the same.
Or so we’re told. It’s debatable whether the back and forth is comforting or frightening. In any case, the Fed will have to act eventually, for good or ill. Meanwhile, they’re watching and so we can all sleep peacefully.
Well, almost everyone. The gold market, for one, is skeptical. An ounce changes hands for around $680, just under generational highs set a year ago. Commodities generally haven’t thrown in the towel on the inflation debate either. The CRB Index, although well off its highs in 2006, looks intent on keeping an open mind about the future path of pricing pressures.

Adding to the anxiety over future inflation is the trend in the U.S. Dollar Index of late. A weaker dollar implies higher inflation to the extent that the country imports goods and services. And the last time we checked, importing was second to none as a favored economic sport in these United States. Imports totaled $184.2 billion in February, up by 33% from a year earlier, according to the U.S. Census Bureau.
If the dollar keeps falling, as some think it will, the trend carries the potential to fan the flames of higher inflation. Curiously, there’s nary a worry in the one market where all of this should theoretically be a primary concern: the bond market. The yield on the benchmark 10-year Treasury has been content to trade in a tight range this year, closing yesterday at around 4.67%. That’s about where it was at last year’s close and for all we know that’s where it may be when we celebrate New Year’s.
The great debate is whether this is irrational or the reflection of market logic that’s drawing on some deeper efficiency that’s otherwise unclear to mere mortals. Or perhaps it really is just about Asian central banks stuffed to the gills with greenbacks and thereby deciding to buy up Treasuries no matter what happens.
Then again, traders take signals from the central bank that’s closest to their trading post. “In our opinion, dollar weakness is not a problem for markets until it causes the Fed to raise rates,” a CreditSuisse economist wrote recently, Reuters reported via The China Post. By that standard, all’s well.