Fed Reserve Ends String of Cuts

The Federal Reserve Open Market Committee voted to leave its target for the federal funds rate unchanged at 2%. The decision was widely expected and officially ended a series of interest rate cuts. Richard Fisher once again rebuffed the majority, this time voting for a rate increase.

The Fed did change the language in its statement to signal a more hawkish stance on inflation. Specifically, the Fed cautioned 'in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.'

The committee also expressed a more optimistic stance on the economy saying that there was 'some firming' in household spending. The Fed also said that downside risks have 'diminished somewhat.'

Although Bernanke is trying achieve a delicate balance between keeping the economy expanding and keeping inflation under control, the inflation hawks clearly won this round. The problem is that the credit markets are far from being healthy, consumers are being squeezed and the U.S. economy is far from being completely out of the woods.

In regards to inflation, it is questionable how effective raising rates right now will be. Higher rates could potentially help to strengthen the dollar, but that's about it. Worldwide demand for commodities is increasing, Congress is unlikely to end ethanol subsidies and Bernanke can't exactly tell people to go on a diet. Stocks are basically unchanged following the announcement as the statement contained no surprises.

The fact that shares of KB Home (KBH), Washington Mutual (WM) and CarMax (KMX) are trading higher reflects falsely-placed optimism and the overall trend in the markets than any change in their actual prospects. Investors would be prudent to seek out industries where earnings estimates are actually being raised.