On Tuesday, when the central bank's chairman, Ben Bernanke, warned the recovery faced difficult headwinds, stocks turned around from an early slump and jumped higher.
Is the Fed becoming irrelevant or simply ineffective? Of course, the first choice is not an option. The financial system pivots on the Fed's policies, which include setting the federal fund rate, which has little drama to it, except when it moves. And lately, it doesn't move. The Fed is also not expected to tamper with the rate until at least 2014. Money will be cheap until at least then.
Inflation figures released this week show the Fed has little to fear that the current bargain basement rate will trigger an explosive bubble anywhere soon. The consumer price index was unchanged May to June and held steady for the second month at 1.7 percent on an annual basis. Core prices, which include food and energy items, rose a marginal 0.2 percent month-to-month and 2.2 percent over the 12 months ending in June. Energy prices have lately headed higher, but spent much of the first half of the year in retreat. Food prices are up 2.7 percent from June 2011.
The Fed stubbornly keeps an eye on core prices, conveniently declaring that food and energy items are separated from the data for a reason: Those prices can swing wildly and skew the data.
Bernanke on Tuesday said bluntly that federal policymakers -- known as the Open Market Committee -- project the unemployment rate will hold above 7 percent through 2014, a generous guess given the gross domestic product grew 2.5 percent July through December of 2011 and is expected to have grown 2 percent in the first quarter of 2012 "and available indicators point to a still-smaller gain in the second quarter," Bernanke said.
"The risks to economic growth have increased," he noted, pointing to fiscal difficulties in Europe and an unresolved debt burden in the United States. He missed pointing a finger at China, on which many have been leaning, but which continues to lower its own growth expectations.
Back to food and energy prices. Recently, the United States tightened its trade embargo with Iran and Tehran responded with renewed threats to close the Straits of Hormuz. Closer to home, soybean prices have risen 17 percent in the past month, while corn and wheat prices have jumped about 45 percent, as dry weather has turned a projected bumper crop year into a potential drought disaster for U.S. agriculture.
"Recent increases in food and oil prices could mean that inflation could rise again," Markit Chief Economist Chris Williamson said in a statement.
That's not fair. As Bernanke said, the economy is not expected to support price increases because there are not enough well-heeled consumers out there to pay higher prices for basic necessities.
Producers, at this point, are facing increased costs with their customer base too defeated to support higher retail prices. This can slow job expansion, for what it's worth, and for the moment it isn't worth much. Wages are the icing on the cake, but consumer spending has dropped three consecutive months through June given the paltry number of new jobs -- an average of 75,000 per month in the second quarter.
Bernanke is headed for Capitol Hill Wednesday for a second day of testimony. More of the same is not likely to be received well on Wall Street, but these days that is a tough call.
In international markets Wednesday, the Nikkei 225 index in Japan slid 0.32 percent, while the Shanghai composite index in China added 0.37 percent. The Hang Seng index in Hong Kong fell 1.11 percent, while the Sensex in India added 0.47 percent.
The S&P/ASX 200 in Australia lost 0.42 percent.
In midday trading in Europe, the FTSE 100 index in Britain was flat, while the DAX 30 in Germany gained 0.11 percent. The CAC 40 in France added 0.7 percent, while the Stoxx Europe 600 gained 0.22 percent.