While hawks and semi hawks are few at the Fed (Fisher, Plosser, Lacker, Bullard), they have expressed their reservations lately with more policy action due to their belief of the law of diminishing returns but also a view that inflation could be let out of the bottle with more action. Bullard a few nights ago expressed concern that more stimulus would “feed into a global oil price shock.” Plosser today is saying that “accommodative policy may let oil prices pass through.” He “worries about easy policy in face of oil price rise.” In fact, Plosser thinks “higher rates may be needed by the end of 2012, early 2013.” I’ve mentioned before that inflation is kryptonite to the Fed in that it would freeze their ability to continue being so easy at a time the economy would be in a too fragile state to deal with an unwind. This said and as doves make up 9 of the 10 voting spots on the FOMC, the majority may in fact do more to offset any economic drag from rising energy prices which we know would just likely further the rally in energy prices. If to occur, the bond market may finally decide to take the printing press away by adjusting rates itself.
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