NEW YORK (CNN/Money) - Never mind how fast the economy is racing, the Fed has no intention of taking its foot off the accelerator.
Following Friday's blowout report on manufacturing from the Institute for Supply Management, bond traders began betting that the Federal Reserve would begin upping rates by its June meeting. But following a flurry of Fed speeches in San Diego this weekend at the American Economic Association's annual meeting, that view is getting swiftly revised.
Fed Chairman Alan Greenspan, in his speech, indicated that the Fed has taken a "risk-management approach to policy." In other words, it plays the odds to try to achieve the most favorable outcome. In the current instance, where measures of inflation are still low enough that the chance of deflation can't be ruled out, that means keeping monetary policy easy. Deflation is just too dangerous an outcome, in the Fed's eyes, while a little inflation wouldn't be such a bad thing -- and could get stamped out easily if it showed signs of really flaring up.
Fed Governor Ben Bernanke -- the bank's go-to guy for laying out its view of the economy -- said in his speech that inflation was still way too low, and that even if the economy grew at 4 percent this year it still may not be able to take up all the slack.
Moving on to market worries about inflation, which are getting fanned by rising commodity prices, Bernanke said nothing doing. Sure oil prices are high, but more supply is coming on line and futures markets indicate that investors expect prices to fall in years to come. The rise in gold? That's more reflective of global tensions than of worries about inflation. And other commodity price rises? They will affect core producer prices, but won't get passed through to consumers.
The drop in the dollar, too, won't be particularly inflationary -- foreign producers will eat most of their losses rather than push them on to final prices.
It's easy to take issue with this stuff, to say that the Fed is being far too lax about the possibility of the economy running too hot. Reckless even.
One can't help but think of former Fed Chairman Arthur Burns, who in the early 1970s ignored the things that were rising in price, and therefore saw very low levels of inflation. And, in fact, Bank of England governor Mervyn King warned at the meeting that the Fed may be on the same course now as it was under Burns' tenure.
But for now, such worries are not the point. The point is that the Fed has no intention of taking the punch bowl away. Party on.
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