The Fed Has Now Served Notice to the Resource Boom

By Dr. Duru written for One-Twenty

January 31, 2006

Market pundits are so stuck on the idea that the Fed is almost finished hiking interest rates that precious few of them read the latest Fed edict for what it truly says. Since you know I like to read the Fed for myself and quote them directly, I will give it to you straight. The key quote from the Fed: "Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures. The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance." (emphasis mine - and note that the rest of the statement contains just a few more sentences. Read it for yourself here.)

What I see in plain English is that the Fed has taken note that the current run-up in prices in all types of natural resources, from copper to oil to silver to steel (or at least the steel stocks!), threatens to disturb the current peace in our inflation situation. Just a few days ago, I rhetorically asked why inflation is not worse given these soaring prices in commodities. I know the Fed must be wondering the same thing. But now they are "on watch" and have declared themselves ready to throw as many interest rates at the problem as needed to keep inflation in check. Yep, I chose my language purposely - the Fed is not done by a longshot. Heck, this latest statement still did not give the financial markets a specific timetable for closing up shop - everything is conditional. As long as we continue to see these commodities run, the Fed will seek to do battle...just as they did against the housing market. In fact, this latest statement also failed to give an update on the housing bubble; the Fed probably thinks they are finally getting that fire under control, but this bubble is not dying without a fight. The irony now is that commodities will only stop soaring once the global economy takes a dive. I also believe that the Fed is under-estimating the inflation threat that these commodities bring to the table. In the end, the Fed will only be finished raising rates once they "squash" the economy. What a bargain, eh?!?

Be careful out there!

DrDuru, 2006