Last week, the Fed put the breaks on rising interest rates by deciding not to hike the Federal funds rate -- which few people know is the only interest rate that the Fed controls. This marks the first time in years -- going back to Greenspan's hallowed tenure, in fact -- that the Fed has held steady. According to a Washington Post article that commented on the news, "recent economic indicators have pointed to a downshift in the economy, led by a cooling housing market, but wages and prices continue to rise, and the Fed made clear its optimism about inflation was wary and conditional." Quoting the Fed directly, the article notes that, "inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand."
I won't attempt to translate Fed-speak -- although with Greenspan gone, I detect a return to English as a second language, rather than a third, in Fed commentary -- but I do believe the Fed is worried about the potential for commodity inflation on a number of fronts. First, rising energy prices -- especially oil related -- are a looming specter as we enter another hurricane season. And this calendar-based energy risk sits on top of the geopolitical energy risk from conflict in the middle east and a new "red tide" in Venezuela and the rest of Latin America . As any good economist knows, energy prices heavily impact the manufacturing and retail sectors, and virtually all consumer areas within the domestic economy. Second, metals pricing considers to display high volatility on a global basis, and despite shrinking FDI in certain sectors within China, the country continues to suck up a tremendous amount of steel, copper, and aluminum, even for domestic projects and local production, keeping world prices high. And consider the possible result of regional labor instability in Latin America impacting a significant amount of the world's copper supply. Taken together, the potential for sustained energy and metals commodity inflation -- and at the least, volatility and instability -- is a very real possibility.
Perhaps this sort of behavior in Belgium will become the norm in the future if inflation picks up. According to Reuters, "about 70 sewer lids, made from cast iron, have vanished since last Thursday in the southern city of Charleroi." Apparently, each cover is worth about 6 euros on the scrap market.