Thought of the Week (Jan 26 2010)

With all the focus on politics, it's worth remembering that the Federal Reserve also faces some very difficult decisions at its FOMC meeting this week. The economic recovery remains tentative with no jobs added as yet. Concerns about a lack of credit have been exacerbated by proposed taxes on bank profits and restrictions on bank activities. At the same time, market fears of monetary or fiscal recklessness seem to be adding to inflation expectations, as can be seen in the chart. We expect the Fed to hold the federal funds rate in a 0-1% range throughout 2010, but there is a risk not only that they will tighten more aggressively but also too soon for a still fragile banking system and economic recovery.