Fed still transitory on spike in inflation

The Fed was pretty clear where it stands on the recent spike in inflation from extremely low levels.

In its statement, the FOMC said: “Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March.  Inflation has picked up in recent months (a new addition to the statement), but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.

The Fed added, “Increases in the prices of energy and other commodities have pushed up inflation in recent months.  The Committee expects these effects to be transitory.”

It’s the publicly stated belief that higher gasoline and other commodity prices won’t stoke a new round of unwanted inflation which pushed the dollar down and gold and silver prices higher in late afternoon action.

Traders believe that Bernanke is not taking a hard enough line on surging commodity prices.

But wage gains remain stable and there’s still some slack in the economy, and that does give the Fed some leeway.

Moreover, Bernanke’s focus is on the tepid pace of the economic recovery, and a hawkish shift in the Fed’s stance is unlikely as long as unemployment remains high and job creation does not substantially accelerate.

Given a ten-year Treasury yield that is below 3.40%, the bond market is more in sync with the Fed, even if gold and the dollar are not.

Still, there are always risks to the outlook, and Bernanke is willing to gamble on an uptick in the core rate of inflation if it means a more robust recovery.