The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Once again, Fisher dissented.

In every statement since August 2006 the Fed has expected inflation to moderate in the next few quarters. From the point of view of the credit markets, (deflation is a net contraction of money and credit), I believe we are already in deflation. From the perspective that inflation is measured by the CPI and/or PPI (a perspective I soundly disagree with), the Fed probably has it correct, finally.

However, the Fed will not like the result. A slowdown in energy prices will be reflective f a slowing US and global economy. Finally, it is important to note that spreads vs. treasuries are rising. Mortgage rates are going up. Corporate bond yields are rising. Libor vs. treasuries remains elevated.

Lower treasury yields are coming in my opinion, but they will not help.

Originally posted at: http://globaleconomicanalysis.blogspot.com/