Peter, Paul and Worry

In its statement, the FOMC said that it expects inflation to moderate in the coming months. To us, it appears as though inflation will not moderate unless the economy implodes under the weight of food and energy prices of the Fed makes it moderate via a more restrictive Fed policy. It appears as though the Fed and Wall Street strategists who believe slackening consumer demand will cause moderating inflation are willing to risk an economic catastrophe for consumers to keep the banks afloat. This may end up being the correct strategy, but we believe it is naive to think that slackening consumer spending will lead to lower inflation and better conditions for consumers.


Currently, we are in a rob Peter to pay Paul scenario. Although core inflation is not dangerously high and it very well could lead to lower core inflation down the road, how we arrive at lower inflation will be stressful for consumers. We will arrive at lower core inflation by way of an increasing amount of consumer cash going to pay for food and energy instead of televisions and electronics. Sure, core inflation may fall, but consumers will be spending at least as much.

Also, falling discretionary spending could lead to more layoffs. The Fed and some strategists point to this likelihood almost as a positive stating that this should lead to reduced spending and moderating inflation. The only way it leads to lower food and energy prices is if people can no longer afford to subsist. Consumers will use money which had been used for discretionary spending or investing (in the markets, business startups etc.), which is more productive for the economy, and instead spend it on survival (food and energy).


This isn't Mr. Bernanke's fault. Some blame can be laid at the feet of Alan Greenspan, but the real culprits are financial institutions who saw dollar signs and believed models which executives did not understand, but told a story they wanted to hear.

Mr. Bernanke knows that higher borrowing rates would have a moderating effect on food and energy prices, but he is handcuffed by troubled banks and brokers. Anger directed toward the Fed or oil companies is misplaced aggression. Anger should be directed toward financial institutions.