The Federal Reserve left its target Fed funds rate unchanged at 5.25 percent for the eighth consecutive meeting today. Today's meeting marks a full year since the Fed last adjusted rates.
In announcing its decision, the central bank’s policy-making Federal Open Market Committee stated that: "Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.
"Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.
"In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”
The Fed's inaction over the past year has come despite rising inflation and a slumping economy. And it is looking more and more certain that Bernanke & Co.'s continued paralysis will lead to stagflation - the combination of rising inflation and recession.
Indeed, in the chart of the consumer price index, it’s evident that inflation has been steadily rising since October of last year.
In addition, GDP has slowed over the past year to an annualized rate of 0.7 percent in the first quarter of 2007. The economy is barely breathing!
The Fed is holding out hopes that inflation will begin to recede and economic growth will be "moderate" this year, picking up in the second half of 2007.
However, the Fed itself has admitted that the housing slump and its impact on the economy will be worse than it expected. "The correction of the housing sector was likely to continue to weigh heavily on economic activity through most of this year - somewhat longer than previously expected," said the minutes from the Fed's May 9 meeting.
To us, a pullback in inflation without an interest rate increase is wishful thinking on the Fed's part. Crude oil prices have risen 24 percent since January, according to MoneyNews.com senior analyst David Frazier, and food prices are steadily marching higher.
Now, the Fed may be able to ignore food and energy prices when it comes to monitoring inflation, but every American knows that they can't live without these necessities.
The Fed is clearly turning a blind eye to the oncoming threat of stagflation. It would rather sit idly by and watch as the two economic disasters duke it out with each other. But there are no winners when it comes to stagflation. It's the worst of both worlds.
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