The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

That, in and off itself, says that the Fed sees things as having changed since the last time they met. The last time they met, they felt that the economic weakness issue was more important than the risk of inflation. Now they are saying that it’s pretty much a tie as to which risk is bigger.

Recent information indicates that overall economic activity continues to expand, Remember, they are looking at the big picture and are looking at things nationally. partly reflecting some firming in household spending Household spending has firmed some, but a closer look at the charts (which I won’t bore you with here) shows that consumer spending is either 1) Spent on essentials like food and gas or 2) drifting slowly downward. So, I don’t see the household spending holding up, especially as people have to cut back in spending in other areas because of the cost of food and gas for their cars.

However, labor markets have softened further As the labor markets soften (a nice way for saying job cuts) more people are going to pull back on their spending and that’s going to be an economic drag. and financial markets remain under considerable stress That would be the understatement of the day. I was talking to someone the other day and used the analogy of the eye of the hurricane. The first three months of the year were very volatile in the credit markets, then things calmed down for the months of April and May. Now, things are starting to stir again. Citibank, us, Goldman Sachs said the entire financial broker business should be downgraded. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters. It doesn’t take a rocket scientist to see that.

The committee expects inflation to moderate later this year and next year. Merely my opinion, but I think they are right and I think that inflation is going to moderate because, due to high oil prices, demand for other goods is going to drop because consumers just don’t have the ability to pay for it. Here’s an example of how I see that playing out. If gas were at $2.50 a gallon, I’d probably take my entire family out to Colorado in October when I have to go there for an orphanage board meeting. However, due to the increase in gas costs, it’s too expensive so just I’m going to fly out. That means that a lot of restaurants, souvenir shops and others are going to miss out on a share of my wallet. Now multiply that by how many millions of households? However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high. Gee, there’s a lot of people who just don’t know what’s going to happen.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. We think we’ve done all we can and need to at this point. Although downside risks to growth remain, they appear to have diminished somewhat, or is it just a lull in the storm? and the upside risks to inflation and inflation expectations have increased. Like I said before, the mood has shifted from leaning toward the inflation risk. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. Don’t worry, the Fed is here and we’re on the job ready to do what we can to help.

Well, there you have it. I hope it helps explain a bit more of what the Fed did, why they didn’t lower rates (fear of inflation), why they didn’t raise rates (they believe that inflation will moderate this year) and where things stand (in a constant state of vigilance and change).

As always, if I can be of help, let me know.