Fed Faces Credibility Crunch

After the Labor Department reported a surprising jump in core inflation Wednesday morning, the afternoon revelations that the FOMC discussed using more dovish language at its January policy meeting felt like reading last week's newspaper.

It turns out many investors were not so wrong last month to believe that the Federal Reserve would remove its tightening bias at the January FOMC meeting. The minutes released Wednesday reveal that the members debated such a possibility.

But the moment for dovish rhetoric was fleeting, as the consumer price index data and a commodities rally suggest the inflation dragon is nowhere near slain. Rising inflation amid slower growth puts the Fed and Chairman Ben Bernanke in a most-loathsome pickle -- how to retain credibility without killing the economy.

"The members discussed whether the balance of risks language in its recent statements still was the best way to represent the views of the committee," read the FOMC minutes.

The committee's views are summed up by one sentence in the document:

"The economic information received since the last meeting pointed to a somewhat more favorable outlook regarding both inflation and economic growth than they had earlier anticipated."

But that meeting came before lackluster January retail sales, soft nonfarm payrolls, a jump in jobless claims, weak industrial production and a below-50 reading on the Institute for Supply Management's manufacturing index. But, growth can dampen a bit and remain near-trend and within the parameters of the Fed's forecast.