The Fed: All talk - no action

The Fed left rates unchanged yesterday despite having recently talking about defending the U.S. Dollar and the threat of increased inflation. After a full day's reflection, the markets' response is clear:

• all major stock indexes off more than 2 1/4% (Dow -296, S&P 500 -32, and NASDAQ composite -66)
• the U.S. Dollar off 73.60 to 72.79 since the Fed announcement
• crude oil up from 134 to 140 also since the Fed announcement despite a U.S. government report that crude inventories increased in the past week. Analysts had expected a reduction of 900,000 barrels in inventory but there was an increase of 800,000 barrels.
  

By law, the Fed must support short-term growth in addition to price stability. Europe's central bank focuses exclusively on price stability. It's president said last Wednesday that their goal is to keep inflation expectations under control. They are expected to raise rates next week.

If the European Central Bank raises rates as expected it is likely that the U.S. Dollar will fall further than it already has. A lower U.S. Dollar will give us even higher gasoline and crude oil prices. Unfortunately, the Fed doesn't count these prices - just the "core" prices derived by subtracting "volatile" food and gasoline. But what could be more central to the average person's life than going to work (requiring gasoline), heating their home (oil or natural gas) and food to eat.

This is having an adverse affect on the average consumer. The Conference Board said that their index of consumer confidence fell from 58.1 last month to 50.4 in June for the lowest level since 1992. The index, started at 100 in 1985, was highest recently in July 2007 at 111.9. But consumer's expectations of the economy six months in the future dropped to its lowest levels since the Conference Board began its work in 1967.

Let's hope the Fed sees the need to increase rates and defend the U.S. Dollar soon.