Fed Hawks Softening Inflationary Rhetoric

Fed Inflationary Dissent

The inflationary discussion was hitting a high prior to the August 5th FOMC meeting, which led anti-inflation hawk Dallas Fed President Richard Fisher to dissent against the Fed decision to keep the federal funds target rate at 2%.

Much of Fisher's support for his opinion came from the continued increase in commodity prices represented in the Consumer Price Index, a representation of the average "basket of goods" consumed by Americans.

Countering this opinion was the Fed majority that pointed to the over-weighting influence of rising energy and food prices, while core inflation (netting out food and energy). This seems to have been the right move as oil heads toward zero and other commodities like gold descend as well.

Fed Watching Inflation, but Eye on Bigger Problems

This growing comfort that Fed policy, to dampen inflation, may currently be at the right level was reinforced at the annual Jackson Hole central banker's economic summit. Fed Chairman Ben Bernanke focused his speech more on the larger picture of stemming future systemic risk in the US economy--outlined in Bernanke's summary, "I have discussed today two strategies for reducing systemic risk: strengthening the financial infrastructure, broadly construed, and increasing the system-wide focus of financial regulation and supervision."

Inflation, Core Fed Mandate

However, hawks like Fisher and currently non-voting Kansas City Federal Reserve President Thomas Hoenig continue to hold a vigilant watch on inflation. Hoenig, in remarks to a central banking conference in Argentina, reminded the audience that although the central banks may need to adjust and focus on financial crisis--they must recalibrate to their core mandate, "price stability over the longer term."

Mortgage Rates May Remain Calm

The moderation of inflationary indicators and balance in overall economic indicators certainly point to continued mortgage market challenges. Yet, in contrast the environment bodes well for new home buyers and homeowners refinancing as mortgage rates get little incentive to move higher in the short-term.