Fed Leaves Rates Unchanged, Walks Tightrope On Inflation

As expected, the FOMC decided today to keep its target for the federal funds rate at 2.00%. Here are some of the highlights from its statement:

• Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress.
• Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
• Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated.
• The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.
• Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

It sounds to me like the Fed is walking a fine line here, saying on the one hand that inflation remains a significant concern, but on the other hand saying it expects inflation to moderate later this year and next year.

I have been on record as saying that inflation is a lagging indicator, and that with U.S. growth having already peaked, and global growth slowing, inflation was likely to follow in the intermediate-term. The recent drubbing of oil and commodity prices confirms this thesis.

Longer-term, a lowering of inflation expectations should bode well for equities and growth stocks. I am not yet ready to proclaim the bull market in energy and materials over. Right now, it remains a sharp correction within a well defined multi-year uptrend.

The Dow is currently up +265 points as of this post