At Wednesday's Federal Open Markets Committee (FOMC) meeting, the Fed held
its rate at 5.25%. With one exception, all Fed members supported the hold.
Interestingly, Jeffrey M. Lacker voted for a quarter point increase.
FIR and MoneyNews readers will not be surprised by the news of a politically
inspired Fed hold, based upon a blind eye turned towards what we term, "stealth
inflation" and possible future stagflation.
Despite some indications of weakness in the economy, signs of inflation
persisted with the core rate rising. But thanks to "cooked CPI books," the
inflation lie persisted in the minds of most Fed governors.
The bond market, in particular, appears to believe the published CPI and has
forced long-term yields to levels that would indicate the Fed would likely cut
rates early in 2007. We believe that this optimism is unrealistic. But, it
allowed the Fed merely to refer obliquely to inflation and intimate that it was
likely to moderate, with lower oil prices. (In fact, with political action in
Nigeria and an OPEC production cut announced, oil rose 3% ($2.05) to $61.40.)
Story Continues Below
All very convenient in front of the election!
But what will be the economic effect later in 2007?
By accepting the "politically convenient" low CPI figure, the Fed is able to
delay the politically and financially unpopular action of raising rates.
But, by "looking" away from the problem of stealth inflation, the Fed is not
curing either inflation or growth. It is just putting off the difficult,
realistic decision into next year. This does nothing but play into the hands of
that most serious of financial viruses — stagflation, which we believe will rear
its ugly head in 2007.
[Editor's Note: Inflation is even higher than the government reports. To
read more about the government's manipulation of inflation data, check out our
report, "The Inflation Lie." Go
here now.]
Meanwhile, the stock markets appeared able to shake off fear of an imminent
interest rate rise and focus on earnings.
Interestingly, the stock market appears to be feeling that, with income
growth and employment looking good, the consumer may not be as property centric
as had previously been assumed. In other words, the current fall in home prices
may not lead to a serious fall in consumer spending.
To date, neither the stock markets nor most financial commentators appear
willing to face the possibility of stealth inflation. They merely ignore it,
perhaps as something too dreadful to contemplate. We think it should be
challenged to avoid stagflation in the longer term.
The stock markets, including the broader S&P, closed strongly. We urge our
readers not to get drawn into this false dawn on anything other than a
short-term basis.
Editor's Notes:
