Politics May Crimp Fed's Inflation Fight

While soaring oil prices have the markets buzzing about inflation, the Federal Reserve is poised to talk tough and take no action this week.

The stance reflects Fed Chairman Ben Bernanke's longstanding hope that oil prices will stop hurtling skyward and that inflation pressures will fade, but some investors are growing impatient with that mantra.

"At the Fed, they do all sorts of mental gymnastics to try to make it appear that whatever is going up in price has nothing to do with too much money being printed or rates being too low," says Bill Fleckenstein, president of Fleckenstein Capital and author of Greenspan's Bubble: The Age of Ignorance at the Federal Reserve. "They have demonstrated with their actions that they have one concern and one concern only -- stimulating economic activity."

As far back as its policy statement in September 2006, Bernanke's Fed has voiced concern about inflation. Back then, with investors panicking about crude futures hitting the $70-a-barrel mark, the Fed said "inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices."

Two years later, crude prices are above $134.65 a barrel, and the Fed has slashed its target for its key short-term interest rate by 325 basis points in less than a year to 2% in the hope of cushioning the financial system and the economy from the perils of the housing downturn and credit crunch. The Fed is expected to hold steady at its two-day meeting beginning Tuesday, but investors until recently were pricing in a likelihood of interest rate hikes later this year.

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