federal reserve

Fed still on hold

Wednesday Dec. 16, 2009
Posted 4 p.m. Eastern

The Federal Open Market Committee, as expected, held short-term interest rates steady and did not provide any clues as to when a rate hike may eventually come. But it did acknowledge improvement in the economy and financial markets, and added an entire paragraph as a reminder that various liquidity programs will expire on schedule in 2010. This seems a nod to concerns that failure to mop up liquidity in a timely fashion could have inflationary consequences.

But by maintaining rates at the lowest possible levels the Fed is keeping the punch bowl full, as the sharp upward sloping yield curve is a boost to bank profitability and the balance sheets of businesses and households.

And now here are a few other thoughts of the day.

Bernanke named Time Magazine's Man of the Year: Time Magazine named Fed Chairman Ben Bernanke as its 2009 Man of the Year. Let's hope this doesn't become like the Sports Illustrated jinx. If the Fed lets the inflation genie out of the bottle over the next couple of years, people will quickly forget that he played a huge role in averting a depression.

Speaking of inflation: The November Consumer Price Index was released this morning, with a much tamer result than yesterday's Producer Price Index. But due to the loss of a favorable year-over-year comparison on oil prices, the CPI is up 1.9 percent in the past 12 months. Take that, deflation worrywarts.

What's more, if the CPI is flat from November to December, that year-over-year rate of inflation jumps to 2.7 percent. Why? All year, people have pointed to the CPI as evidence of deflation when the real reason the index was running in negative territory was that oil prices spent much of 2008 in triple digits (remember that?). But in the fourth quarter of 2008, oil cratered to $40 per barrel. We're now comparing $70 oil to $40 oil last year, instead of the $140 oil that served as the comparison just a few short months ago.

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