Wednesday, August 09, 2006

Fed likely to remain paused for at least the next year

As I expected, the Fed did in fact pause at the FOMC meeting today, but note that inflationary pressures are still a risk. Now, attention will focus on how much additional inflationary pressure might be needed to force the Fed back into hike mode.

My unchanged view is that although the Fed has a strong preference for inflation in the 1% to 2% range, even the 3% range is somewhat tolerable, at least for a span of months. Even with the latest spike, oil prices still haven't advanced significantly beyond their peak for the year to date. Ditto for gasoline. Speculators are still bullish on commodities, but overall, commodities prices have lost much of their upward momentum.

It may take a number of months or even an entire year for inflation to pull back into even the 2% to 3% range, but the Fed has in fact done all of the heavy lifting and now has the luxury of sitting back and watching the fruits of its labors gradually take root.

-- Jack Krupansky


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