Market Talk

Obviously, Japan is the big story, the very big story. But there’s something else worth pointing out today: inflation expectations here in the U.S. In short, they are rising, maybe faster than the Fed expected, and that may create problems for the central bank that it wasn’t exactly expecting to face this soon.

This is perhaps best illustrated by the story of William Dudley, the head of the New York Fed, who took a trip across the East River this morning to speak to the Queens Chamber of Commerce. You can read about his prepared remarks in this WSJ write-up by Newswires’ Michael Derby. But the really interesting part occurred when he took questions from the audience.  Derby elaborates:

New York Fed President Dudley just faced down a Queens, N.Y., audience that was having a hard time buying his contention inflation is low and likely to stay that way.

He was challenged by one audience member, who said, “when was the last time, sir, you went grocery shopping?” Dudley responded “I certainly acknowledge food prices have gone up.” But he added some prices are lower and he noted “today you can buy an iPad 2 that costs the same as an iPad 1, that’s twice as powerful,” as an example of favorable price dynamics.

His example was greeted with widespread grumbling in the audience, in an unusual display of discontent at a Fed speech. Dudley’s struggle is a harbinger of the trouble policymakers are likely to face over coming months, amid the good chance food and energy prices are on a sustained move higher.

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Dow Jones’ Michael Derby reports:

Fed’s Bernanke calls the outlook “unusually uncertain” and notes the central bank is prepared to take additional action if needed.

His economic outlook sees lower than expected inflation and at best a slow pace of falling unemployment levels. He notes financial conditions are hindering growth and expects interest rates to stay low for “extended period.”

He also says the Fed is continuing to think of ways to shrink its portfolio, and any asset sales will come gradually.

Bernanke’s comments to Congress are largely as expected, but some may be a bit taken aback by his comments on shrinking the balance sheet, which doesn’t suggest much central bank appetite to provide additional stimulus to a troubled economy.

Bernanke says the economy needs continued government stimulus now, but says it’s also important to form plan to bring longer run deficits back in line. He says of stimulus now “I would be reluctant to withdraw support too precipitously,” given the economy’s current challenges.

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Believe it or not, there are other things going on in the world besides everyone watching some dude in a black turtleneck and jeans play with a brand new touch-screen device.

As expected, the Fed leaves short-term interest rates near zero, but gives a slightly more upbeat reading of the economy’s outlook.

Here’s a snip from Dow Jones reporter Michael Derby in the wire’s version of Market Talk:

The FOMC statement looks pretty free of surprises. On rates, it says “the Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” It has also reaffirmed its plan to end mortgage purchases at the conclusion of March, along with again flagging the impending end of most of the emergency lending programs.

Also of note is Kansas City Fed President Thomas Hoenig voting against keeping rates so low. He remains concerned that all the stimulus funneled into the economy to fight the crisis may ignite inflation in the future.

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