Home > The Merk Perspective > Merk Insights > December 14, 2010

Merk Commentary: Fed - Inflation, Inflation, Inflation

Axel Merk
December 14, 2010

Axel Merk, Portfolio Manager, Merk Funds

December 14, 2010

In August, Federal Reserve (Fed) Chairman Bernanke stated inflation was too low; in October, the Fed's Minutes lamented that the market appeared not to take Bernanke's August statements seriously enough. In our assessment, today's Fed statement of the Fed's Open Market Committee (FOMC), with an almost verbatim repetition of the previous FOMC statement, screams: "markets: trust us, we mean what we say."

When former Fed Chairman Volcker raised rates in the 80's to root out inflation, initially, the markets didn't take him seriously. But persistence eventually made the market price in lower inflation expectations. Similarly, as the markets appear slow to embrace the Fed's at higher inflation target. We have little doubt, however, that the Fed will succeed in raising inflation expectations.

Today, there is a key difference to the early 80's: at that time, both inflation and inflation expectations were high. In the current environment, current inflation may be low, but future inflation expectations are not; until Bernanke's August speech, future inflation expectations were within historical norms. Since then, however, future inflation expectations have been moving up to levels we believe are not consistent with price stability.

The risk, in our view is, that the Fed will get more than it is bargaining for. Having said that, it's a problem for tomorrow and the Fed has rarely been accused of being too far-sighted.

Axel Merk
President and Chief Investment Officer
Merk Investments, Manager of the Merk Funds


This report was prepared by Merk Investments LLC, and reflects the current opinion of the author. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any investment security, nor provide investment advice.


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