The Fed seems to have changed its discourse of late and the markets seem to be pricing this in. Bernanke's rhetoric has shifted from coming to the rescue in the event of a slowdown to intervention even if there is no slowdown, and part of the problem may reside with an over reliance on core inflation figures, an indicator that may not be showing the full picture with regards to inflation. Over the past decade, for example, headline inflation, which includes both food and energy, remained substantially above core inflation. Had the bull period continued for a while longer, core inflation may have headed in the same direction as headline and there were already signs of this happening just before the sub prime market blew up.
The Fed's argument for relying on core figures is twofold. They not only see both food and energy as just noise but they also don't feel there is much that can be done to control them in any case. Currently both food and energy prices have been soaring which begs the question as to whether inflation may be around the corner and that it may be just a question of time before it rears its ugly head to an unprepared Fed.
