The Federal Open Market Committee drew its line in the inflation quicksand on June 25 and held its target for the federal funds rate at two percent. It pointed to “recent information that overall economic activity continues to expand,” acknowledged that “labor markets have softened further,” and clung to its view that inflation will “moderate later this year and next year.” But in the face of higher prices for energy and  “some other commodities” the FOMC found that “uncertainty about the inflation outlook remains high.”

The Fed met expectations, and the markets were seemingly unrattled by the decision. Yet by the end of trading on June 27, the Dow Jones Industrial Average had tested bear territory, and the index closed at 11350.01 points on June 30, off 19.9 percent from its 14164.53 closing high on October 9. Battered by the troubled old-line U.S. automakers and the dismal financial sector, pummeled by sour U.S. housing market numbers, weak jobs data, flimsy consumer spending, and signs that stagflation is taking hold in Europe, June was the cruelest month for the DJIA since June 1930.

In its annual report released last week, the Bank for International Settlements cautions that a combination of financial market turmoil, deteriorating real estate markets, and inflationary pressures “does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect.”  The BIS report notes: “With inflation a clear and present threat, and with real policy rates in most countries very low by historical standards, a global bias toward monetary tightening would seem appropriate. That said, the circumstances of different countries…currently rule out a ‘one-size-fits-all’ response.” Well, so much for clear and present advice.

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