Wednesday, August 8, 2007

Bernanke Nails It.

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent." announced the Fed today.

They continued "Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy."

"Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures."

Finally, "Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information."

For those interested in how this statement is similar to everything they have said up until this point, go here

Inflation, inflation and inflation. Until it's ebbs, rates will not drop. Big Ben has been saying this since he took office repeatedly and hopefully the street gets it soon so we do not have all the speculation before each meeting. It will also be good for stocks as things will level out once they come to the reality that Bernanke is telling them what to expect from the Fed. It seems they may be beginning to get it as today the DOW, S&P and Nasdaq were essentially unchanged.

The Fed will not bail out lenders that made dumb loans and now are in trouble. Bernanke is going to let the market work (as he should) and it is already taking care of things. Bad credit is harder to get, and hopefully credit standards return to what they should be. Both of these are good things long term.

Even if growth slows, that is ok as long as inflation stays contained. Given the choice between slowing growth and high inflation, high inflation should always be fought because it always is a economy killer.


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