Amidst many widely followed data points that show that inflation, consumer spending, and employment levels are on the rise, today's FOMC statement conspicuously avoided any hint that monetary tightening is even being considered. Instead, the Fed indirectly patted itself on the back for some perceived economic gains without committing to any of the logical monetary steps that these improvements should have triggered. Their stance appears to remain that although a full recovery is nigh, the economy will remain dependent on near-zero interest rates through 2014. They hope that no one notices the contradiction.
Some might suggest the Fed's failure to explicitly forecast QE3 is evidence that some degree of tightening is in the offing. They are grasping at straws. The Fed is running QE with or without an overt policy behind it, and will likely only show its hand if it feels it is necessary to prop up a faltering stock market, which currently we do not have.
Otherwise, the Fed would prefer to keep quiet about the flood of inflation it is creating. If it were to speak the name of this growing threat, it might be called on to stop it. But Chairman Bernanke knows that any policy designed to restrain inflation will also derail the phony recovery that the Fed has labored so hard to engineer. The higher rates needed to bring inflation under control, and knock down the price of oil for instance, would trigger a greater financial crisis than the one seen in 2008.
The Chairman said that the rising oil price is pushing up inflation in the short-run, but that the threat will subsequently subside. Bernanke is wrong on both counts. First, it is not that higher oil prices are pushing inflation up, but that inflation is pushing oil prices higher. Second, since the Fed has pledged to continue to create inflation, the rise in oil prices will not subside, but accelerate.
If the government's phony economic data continues to show recovery, the Fed's position will become increasingly precarious. More so than private-sector economists and the public at-large, the Fed knows that the economy is completely dependent on near-zero interest rates. As the Administration tries harder and harder to prove a genuine recovery in the lead-up to the November election, Bernanke will find himself caught between deception and depression.