The Fed stands still

June 27, 2008 - PRLog -- Mike Larson discusses how the Federal Reserve is still not doing anything about inflation and the falling dollar. Mr. Larson takes a closer look at how other sectors are performing and other markets are adapting to global inflation.

Recently, investors were looking for a strong Fed statement because they believed it would support the dollar and end the recent surge in commodities prices. But instead of reassuring Wall Street and giving investors an excuse to drive stocks higher, Federal Reserve Chairman Ben Bernanke did neither. Investors expressed their disapproval by responding with a strong statement of their own.

“The Fed is talking tough about inflation, but making it clear it isn't going to do anything about it. “

The U.S. Fed is standing still while central banks in other countries are raising their rates, making the dollar a less attractive destination for international funds.

•   India raised rates by a half-point the last week of June;
•   Norway raised rates by a quarter-point;
•   Brazil raised rates by half a percentage point to 12.25% earlier in June; and
•   The European Central Bank has strongly suggested it will do so soon.

Even the Bank of England, whose country is also getting hammered by credit losses and a housing slump, has gone nowhere near as far as the Fed. It has lowered rates just 75 basis points since last fall versus the 325 basis points here in the U.S. The Fed's refusal to raise rates is accommodating the increase in commodities prices and causing the dollar to slump even further.

After the Fed news came out, the dollar index dropped by more than 100 basis points. The euro is once again closing in on its late April high of 1.6018. The Australian dollar is close to reaching a new high. And the Brazilian real is heading steadily higher, trading at its highest level against the dollar since January 1999.

Also, gold jumped more than $30 on June 26 and looks ready to head even higher. Crude oil dropped just below $132 a barrel before the Fed news hit. After the news, crude started rallying back. It then added another $5.09 on June 26 to close at $139.64, an all-time high.

“The financial and real estate sectors were all poised to rally on the assumption the Fed would put a knife through the heart of commodities. It didn't. That caused most financial stocks to give up their pre-Fed rally on Wednesday June 25, and then sell off even harder on Thursday.  As for the Dow Jones Industrial Average, it's hanging on by its fingernails in the 11,600-11,800 range. This area corresponds to the double bottoms made in late January and mid-March. If the Dow goes over Niagara Falls like the financials already have, unprepared U.S. investors are in for a world of trouble,” Larson states.