Fear of Falling

What was most interesting to me, emerging from the Fed Minutes, released today, was the inflation discussion that was held at the last Fed meeting.

As I have been stressing for several weeks, falling inflation is becoming as much, if not more, of a concern for the Fed than rising inflation. While the Fed's policy-setting arm, the Federal Open Market Committee (FOMC) appears to believe that declines in broad price measures will prove transitory, I tend to doubt it. 

As subscribers to my premium newsletter know, I am positioned in ways that benefit from continued benign inflation and an equally benign Fed.

And benign it will be, at least here at home. What is worrisome is that deflation abroad, where recessions are beginning, or deepening, in Europe, Russia, Japan, Brazil and to a lesser extent, China, is accelerating. Of those areas, only Brazil is battling inflation. Falling prices are getting close to ground zero in Europe and are already there in Japan.

While, according to the Fed's minutes, the Fed did not explicitly mention global concerns in its last statement on interest rates, global weakness and deflation were discussed as risk factors in assessing the outlook for future US growth.

What's a Fed to Do?

Today's minutes did not clarify, though, as to when the Fed plans to begin normalizing interest rates, nor did it clarify whether the deflation threat abroad is being taken seriously enough at home.

With dollar strength continuing, that already puts downward pressure on domestic inflation and eats into multi-national profits, as I have discussed before.

A 10% gain in the value of the dollar is roughly equal to a half-point rate hike by the Fed, all other things being equal.

So, by definition, tighter policy, however unintended, has arrived, which should obviate the need for the Fed to act precipitously in early 2015.

A World Away

Unfortunately for the Fed, not all central banks are responding adequately to the respective weakness in their economies. The European Central Bank has yet to launch a broad-based and bold Quantitative Easing program to stimulate its economy and lift inflation from dangerously low levels. Russia is spending billions to support the ruble, while raising rates in the currency's defense, as well. Raising rates amid a deepening economic, and geo-political, crisis is hardly a recipe for growth.

China is putting its foot on the accelerator and then braking, giving a jerky-jerky motion to the Chinese economy and while Japan may be preparing much more sizable stimulus, it is still reeling from the realization that it just re-entered a recession.

Sealing the Border

From my vantage point, the Fed may have to act as border patrol agent to keep the world's unwanted characters from entering our economy. I mean that metaphorically, of course. What we don't want is imported deflation and overseas weakness to adversely affect an economy that is just about ready to leave its sick bed and walk on its own.

What Me, Worry?

I remain confident that the US will continue to grow, thanks to tailwinds from falling energy prices, rising employment and modestly rising wages. That's why my VIP portfolio is focused on brand name businesses that do plenty of business here at home. And there are plenty of those names to choose from.

To me, the US stock market still looks poised to rise further, today's tentative action notwithstanding.

I am, however, concerned about how the Fed handles deliberations over external threats. If they just brush them off and hope they won't affect the US down the road, I would get a little more defensive. But if they continue to communicate their concerns about the real outside world, I will sleep well knowing they will do what it takes to protect our economy and save its worries about rising inflation for a later today.

Help is on the Way

For a more complete guide on how to handle investing in an uncertain world, feel free to peruse the wide variety of ways you can access my premium content, "Insana's Market Intelligence." It's all right here on Marketfy and easily available to those who enjoy a deeper dive on Wall Street.