It is a great time to be long equities when the fed stops merely jawboning inflation and begins to act to reign it in, which will be soon if the market doesn't function efficiently to do so first. Wait? Higher interest rates good for equities? Absolutely. A stronger dollar will increase the American consumers purchasing power, freeing up discretionary income, and boosting the 67% of the economic pie that those dollars flow into. Higher rates will also dramatically reign in imported inflation on everything from oil to copper. http://www.nytimes.com/reuters/business/business-usa-fed.html Inflation - Wary Fed Looks Ahead to Rate Increases By REUTERS Published: May 28, 2008 Filed at 11:46 p.m. ET SAN FRANCISCO (Reuters) - Two Federal Reserve policy makers warned on Wednesday that interest rate increases might be needed before too long to curb inflation, even as the United States struggles with a weak economy. The remarks solidified expectations that the Federal Open Market Committee has ended an aggressive rate-cutting campaign and could start to reverse its policy course late this year. Dallas Fed President Richard Fisher and Minneapolis Fed President Gary Stern, both voting members of the FOMC in 2008, said they are keeping a close eye on inflation expectations being dialed into financial markets. "If inflationary developments and, more important, inflation expectations, continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, Fisher said in San Francisco. Rate increases could be made "even in the face of an anemic economic scenario," Fisher told the Commonwealth Club of California, adding that he did not expect a recession. Fisher said it would be "unacceptable" for the Fed to be viewed as resigned to higher levels of inflation. That is a particular risk as the lagged impact of the Fed's interest rate cuts starts to kick in, boosting economic growth at a time inflation is already "too high" and commodity prices are being pushed up by strong global demand. Earlier, Stern vowed that the Fed would act in an "appropriate and timely" way. "The key to maintaining low inflation and inflation expectations is likely to be the timeliness and magnitude of decisions we make to reverse course" on interest rates, Stern told a local business group in Altoona, Wisconsin. SO FAR SO GOOD? The Fed monitors inflation expectations as a test of what assumptions are priced into markets and, by implication, consumer behavior. Central bank officials have expressed concern the United States may face early signs of stagflation, the damaging combination of weak growth and wage-price spiral that hit the world's biggest economy in the late 1970s and early 1980s. Stern suggested the Fed had been able to hold the line. "Inflation expectations have remained reasonably well anchored so far, which is encouraging," he said. Headline inflation, which includes food and energy prices, "is clearly too rapid for comfort," he said, adding that core measures "have been better behaved." The Fed lowered its federal funds rate to 2.0 percent in April, the latest in a string of cuts started in mid-September, when the rate was at 5.25 percent, to shield the U.S. economy from the fallout of a housing and credit crisis. Fisher has been one of the Fed's most vocal policy hawks this year, and on Wednesday termed inflation "a sinister beast" and the "enemy of capitalism." He has tallied three straight dissents against the FOMC's decisions to lower interest rates. "Growth cannot be sustained if markets are undermined by inflation," Fisher said. "Stable prices go hand in hand with achieving sustainable economic growth." But Stern said the Fed was still walking a policy tightrope given the combination of weak growth and rising inflation pressures, that demands delicate action. "We are seeing challenges on both sides of that (dual mandate) and I think we are simply going to have to navigate the minefield," he said. In particular, Stern said it was unclear if federal tax rebate checks now being mailed to millions of Americans would have an impact beyond one or two quarters. Some forecasters fear that the United States faces a "double-dip" slowdown, with growth likely to pick up in the next few quarters on the back of the stimulus package, before fading again in late 2008 or early 2009. Fisher said figures like Wednesday's stronger-than-expected April durable goods orders, while hard to view in isolation, were a sign that the most disastrous outcomes predicted for the economy have not played out. "We'll have anemic growth for a while, but to me, inflation is the bigger risk," he said. ANOTHER ONE BITES THE DUST Separately, the FOMC will lose a voter with the departure of Frederic Mishkin, effective August 31. The Fed's usual line-up of seven governors, including the chairman and vice chairman, will dwindle to four because of two vacancies that have been unfilled for months. "This will mean the departure of an influential dove," said David Sloan, analyst at 4CAST Ltd in New York. Mishkin, seen as an ally to Fed Chairman Ben Bernanke in his support of formal inflation targets, will return to his teaching post at Columbia University's Graduate School of Business.