Fed Decision: Deflation vs. Inflation
With the Fed in meetings the next two days, and fears of heavier inflation much greater than ever before, Bernanke and company find themselves in a very difficult spot and will have to tip toe around inflation fears and focus on their bigger fears of deflation.
The bottom line is that they just cannot let long term rates get too high, and therefore smother this already weak economy. These fears of deflation will easily take precedence over inflationary fears.
The US economy is still facing rising un-employment, massive foreclosures, and historical credit card defaults.
The Fed is not going to raise rates, but there will be very strong language in regards to them moving away from buying more treasuries. They will continue to help the banks and buy up a lot of the toxic assets such as mortgages etc.
I wrote in an article a couple of weeks ago, Why the Oil Roller Coaster Ride is Over, I stated that I thought that oil prices would cool off and they have. This teeter totter trend, from fears of inflation to fears of deflation is the razor’s edge in financial markets.
The Fed will look to bring back fears of deflation into the market, the kind that keeps oil prices low and the dollar afloat.
As a Fed concern, deflation is still winning in the short term, but inflation is definitely going to win the war.
- Does anyone really think there will be economic harmony over next 10 to 20 years?
In the long term high commodity prices are here to stay and this does not and bode well for the US economy, or any economy that is addicted to things like oil. It does however bode well for countries like Australia, Brazil, and Canada who are exporters of commodities.
About the Author
Bob O’Brien
Head Instructor
bobrien@mywealth.com
