This week, as the Fed came through with its highly anticipated pause, it conspicuously left the door open to future rate hikes. Apparently the rhetorical vigilance took most currency traders by surprise, sending many scrambling to buy dollars. However, given that any weaker statement would have caused a stampede out of the dollar, how surprising should the tough talk have been? Any indication that this was not a “wait and see” pause would have sent both long-term interest rates and consumer prices up, undermining the “benefits??? of the pause. So in an apparent attempt to have its cake and eat it too, the Fed “paused??? while pretending that it really had not done so.

The Fed’s claim that it is concerned about inflation, and that it will act decisively to contain it, is just a bluff. Any real commitment would have prompted the Fed to have already raised rates much higher. For the Fed to suggest that it stands ready to raise rates in the future, if the data warrants it, completely misses the point that the data warrants it right now!

The flawed CPI is nonetheless a lagging indicator of inflation. There is so much inflation already in the pipeline that its effect on consumer prices will be seen for years to come. For now, the Fed’s private concern is to keep the markets from understanding just how bad inflation already is, and how little resolve it actually has to do anything to contain it. Far from being concerned, the Fed likely views inflation as the only solution to America’s problems; a monetary “get out of jail free card.??? The U.S. now owes so much to foreigners that not only is legitimate repayment impossible, but the very act of servicing the debt will soon become unbearable. Debt repudiation through inflation likely appears to be the most politically palatable “solution.???

Perhaps out of fear of being blamed for an economic downturn, the Fed’s overriding concern now appears to be keeping the U.S. from falling into a recession. Without a pause, this would likely be impossible, so pause it must, inflation be damned. My guess is that the Fed will continue to ignore evidence of worsening inflation, using growing signs of a weakening economy as cover for its complacency. All the while it will continue to brag about its “vigilance??? and commitment to hiking rates further should inflation become a threat.

The $64 trillion question is just how long it will be before the markets call the Fed’s bluff. Once it shows its cards, we had all better batten down the hatches, in preparation for a monetary perfect storm. Though Greenspan may have sown the winds, it’s Bernanke and the rest of us that will reap the whirlwinds.