At today's FOMC meeting, the Fed held its rate at 5.25 percent. With one
exception, all Fed members supported the hold. Interestingly, Jeffrey M. Lacker
voted for a quarter point increase.
Financial Intelligence Report readers and MoneyNews readers will not be
surprised by the news of a politically inspired Fed hold based on 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 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 percent ($2.05) to $61.40.)
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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
turning a blind eye to 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: The government is lying about inflation.
Protect
yourself 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 focused on the slumping
housing market as had been assumed previously.
In other words, the current fall in home prices may not lead to a serious fall
in consumer spending.
[Editor's Note: Sir John Templeton first warned housing prices could crash 50
percent. Discover how to protect yourself and even profit from the housing
crash.
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here now.]
To date, neither the stock markets nor most financial commentators appear
willing to face the possibility of stealth inflation and choose to merely ignore
it, perhaps as something too dreadful to contemplate. We think it should be
faced 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:
