While individual investors are as bullish as they’ve been in over a year – no doubt buoyed by the price action of the S&P – the Fed appears to be quite worried about a host of things. You know – deflation, high unemployment, the moribund economy – stuff only a real worrywart would care about.
After all, everything looks great to Mr. Market!
What – me worry? (Source: StockCharts.com)
The Fed, though, could probably use one of Mr. Market’s chill pills. According to Ben & Co, Deflation is a little too close for comfort right now – from Bloomberg:
“Inflation is likely to remain subdued for some time before rising to levels the committee considers consistent with its mandate,” the statement said.
Translation: We gotta get these CPI numbers up! And we’re ready to do what we need to do:
“The committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate,” the Federal Open Market Committee said today in a statement in Washington.
Finally, the most laughable predication of the day:
U.S. central bankers are on guard against an economy that may be stuck at a pace of growth that won’t generate higher levels of employment for years to come. Fed officials in June forecast the unemployment rate would be in a range of 6.8 percent to 7.9 percent by 2012.
While future Fed action looks baked in the cake, the most interesting markets to watch IMHO will be gold and the dollar. Gold SHOULD rise, and the dollar SHOULD fall as a result of future Fed asset purchases – and that’s exactly my problem with these predications. They seem too obvious and easy to call.
So, we’ll see if the deflationary headwinds are enough to thwart the Fed and its efforts to bump up the rate of inflation to more “comfortable” levels.