Fed Misses Real Economy Again

Eighteen months ago, I accused the Fed of manipulating inflation data as well as constructing a deflation hoax. With hindsight, it appears that both accusations were correct. I also anticipated a rocky outcome when the Fed normalized unsustainably low interest rates. The consequence of that maneuver remains to be seen, but the outlook depends on the Fed's next move.

I can only fathom a guess as to why Fed officials manufactured that scare: In order to keep the economy cooking through his scheduled retirement, the Fed chairman required a not insignificant dose of artificial stimulus. Well aware of the wealth effect, especially from real estate appreciation, Greenspan initiated a bull market in property with artificially low interest rates. The deflation scare was just a ruse to camouflage his true stimulative intentions.

However, my column highlighted the obvious inflation risk last spring. Commodity prices were starting to advance. Service prices such as education, insurance, entertainment and health care premiums were rising rapidly. Real estate prices were soaring. The only real deflation out there was from Wal-Mart-purchased, Chinese-manufactured widgets. The only problem is this is a service economy and those expenditures were immune to Chinese competition -- and retail widgets are a small part of the economy anyway.

We all know what has happened to the headline CPI since, even with the hedonic adjustments. ...