The Federal Reserve yesterday released the minutes of its March 20-21 FOMC meeting and confirmed the worst-kept secret in finance and economics: inflation’s still a problem. Or a concern. Or something.
Anyone who’s taken the time to look at the numbers dutifully released by the government each month already knows that there’s reason to wonder if the price of money might rise again to fight any resurgence of the dark enemies of price stability. Notably, the core CPI (which excludes food and energy) shows no sign of moderating.
For good or ill, the Fed pays close attention to core CPI, and so the future path of interest rates may very well be determined by this inflation gauge. With that in mind, over the 12 months through February, core CPI rose by 2.7%. Not only is that near the highest level in years, it’s also well above the Fed’s comfort zone. “On a twelve-month-change basis,” the Fed minutes advised, “core CPI inflation in February was considerably above its pace a year earlier, largely because of a sharp acceleration in shelter rents over the past year.”

To be sure, the minutes also remind that the Fed hasn’t lost all hope that core inflation will moderate. Still, reasonable minds might conclude that such hope seems to be fading a bit in the halls of monetary power. Consider, for instance, this excerpt from the minutes:

…the prevailing level of inflation remained uncomfortably high, and the latest information cast some doubt on whether core inflation was on the expected downward path. Most participants continued to expect that core inflation would slow gradually, but the recent readings on inflation and productivity growth, along with higher energy prices, had increased the odds that inflation would fail to moderate as expected; that risk remained the Committee’s predominant concern.

For some observers, the Fed’s mixed reactions about inflation are unsettling. “This is the most inconsistent piece of communication we have seen under the new Fed chairman,” David Jones, head of DMJ Advisors, a consultancy, told AP via “I think there is a big fight going on inside the Fed between officials who are more worried about inflation and those more concerned about growth.”
At the moment, the central bank may be compelled to err on the side of fighting inflation. That, at least, was the message from one Fed head yesterday. “If inflation does not moderate, I believe additional firming may be needed,” Richmond Federal Reserve Bank President Jeffrey Lacker said, according to Reuters.
Nonetheless, there wasn’t enough conviction to materially change the outlook by way of Fed funds futures. Although sellers took a toll in some contracts, by and large the market still expects no change in Fed funds for the foreseeable future.
As for the FOMC, there appear to be two prevailing strains of thought circulating. Some members are clearly worried about inflation; others are still hopeful that pricing pressures will fade without any further tightening from the Fed. Investors can decide which outlook looks more compelling.
Mr. Bernanke has the power to clarify the central bank’s position, of course, although he seems reluctant to make definitive statements. That’s hardly surprising, given the Fed’s history of warm and fuzzy public pronouncements. Nonetheless, occupying the gray zone carries elevated risks at this delicate juncture in the economic cycle.


  1. franko

    At least (given the parlous state of the whitehouse/administration under GWB in his second term, and a VP who is also on his last fling at public service) there’s really no chance of any coherent political interference on monetary policy, and that will probably be the case til after november 2008. Not sure how much of a bright side this is, but there it is nonetheless. Another factor is that this is still early in Bernanke’s tenure (presuming that he’ll serve a decade at least) and therefore in times of uncertainty, I would expect him and his team to err on the side of being stern. The analogy being that this akin to september in the school year, and teachers know that it’s better to be strict early and then lighten up in spring, whereas trying the reverse is less appetizing for all concerned.

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