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The Fed's Unfortunate Choice Of Words

The Federal Reserve Board's Open Market Committee (FOMC) met Tuesday to discuss the economy, in a release in the afternoon provided it customary guidance to the markets on monetary policy. Since January, "the economic recovery is on a firmer footing," said the board -- an unfortunate choice of words, perhaps, given the disaster in Japan. And to mix in some additional metaphors, the FOMC said that it will stay the course with the second round of quantitative easing, $600 billion worth, and it's steady as she goes on interest rates.

What the Committee doesn't say can be just as telling, and this time around they omitted saying that employers were reluctant to hire people. The bottom line is that the Fed's policy rate will be held at 0 to 0.25 percent for an "extended period." ("No change" met the expectations of 90 percent of the economists participating in Bloomberg's survey on the meeting.) Unemployment is high, the economy has plenty of slack capacity, and inflation expectations are low, all of which justify the continuation of low rates.

Not so fast -- today producer price inflation was reported at 1.6 percent for February, more than twice the pace forecast by economists. You know the reasons: food and gasoline. Even the highest forecast was looking for just 1.1 percent.

The cost of food increased 3.9 percent, the most since November 1974, while energy prices rose 3.3 percent led by a 15 percent jump in home heating oil, Bloomberg reports.

There are several forces pushing in different directions, but the inflation surge may be over for a while. The horrible news of the last five days probably means lower economic growth, surely for Japan, but possibly for its trading partners (e.g. the United States). Oil prices have weakened as well, perhaps reflecting lower expected demand, or reacting to Colonel Qadaffi's regaining his grip on Libya. The FOMC made no mention of what Japan's difficulties might mean, but then, they really are not in the forecasting business.

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