July 3 (Bloomberg) -- It's not an easy time to be a member of the Federal Open Market Committee. You learn in Economics 101 that you tighten interest rates in an inflationary environment and ease on weaker economic demand. When faced with the dreaded ``S'' word -- stagflation -- there are no sure textbook answers.

So you could hardly fault the FOMC on June 25 for deciding it was best to push the pause button at a Fed Funds rate of 2 percent. With some forecasters now projecting inflation accelerating to as much as 6 percent on price increases in energy, food and other commodities, the Fed could have defended a pause as the best of bad options amid potential stagflation.

If the FOMC members had just closed the discussion with their statement that rising energy and commodity prices meant ``uncertainty about the inflation outlook remains high,'' I would have had little to question or criticize. But then they chose to add the phrase ``although downside risks to growth remain, they appear to have diminished somewhat.'' And that suggestion -- that the economy is looking somewhat better -- is where they lost me.

What exactly has the Federal Reserve seen between their previous meeting on April 30 and the June 25 gathering to justify their assertion that the risks have diminished?

Sure, if you are looking for a few optimistic nuggets, your note card isn't completely bare. You can point to first-quarter gross domestic product growth being revised up from 0.9 percent to 1 percent, and consumer spending rising 0.8 percent from April to May with the help of stimulus checks. But for anyone looking at the overall weight of the economic evidence from April 30 to June 25, it is hard to see how the Fed justified its more positive language on the projections for a growing economy.

Job Losses

Let's start with the two employment reports since April 30. The ones on May 2 and June 6 marked the fourth and fifth consecutive months of private-sector job losses -- 77,000 over those two reports and 324,000 lost in the year through May.

Unemployment soared to 5.5 percent in May from 5 percent in April, the biggest one-month jump since 1986. And for those ready to argue that 5.5 percent isn't so bad historically, remember that if it weren't for decreased labor-force participation since President George W. Bush took office in 2001 the actual jobless rate would be about 7 percent.

Perhaps, you say, I am missing recent positive data, or failing to look at the medium-term projections the Fed is supposed to do when considering monetary moves, but those figures are hardly more comforting. On June 24, the day before their last statement, the Conference Board consumer-confidence report slumped to 50.4, a decline of 40 points in six months, and its lowest level in 16 years. Consumer expectations for the health of the economy were the lowest in the survey's 40-year history.

`Beyond Our Expectations'

The day of the June 25 FOMC meeting, American Express Co. Chief Executive Officer Kenneth Chenault reported a rapid increase in late payments while stating that ``business conditions continue to weaken in the U.S. and so far this month we have seen credit indicators deteriorate beyond our expectations.''

As to the medium term, once the stimulus checks disappear, Merrill Lynch & Co. expects consumer spending to drop 2.2 percent from the end of September to the beginning of March next year while Goldman Sachs Group Inc. forecasts a 1 percent decline.

The immediate and medium-term data on housing -- the economic elephant that refuses to leave the room -- were no better. The day of the Fed announcement, a 40 percent year-over- year decline in new-home sales was reported for May. The day before, the S&P/Case-Shiller home-price index had a 15 percent slump over the previous year -- its sharpest decrease on record.

Inventory Record

And if you thought the Fed was optimistic about the coming months due to shrinking home inventories, think again. Even with declining housing starts, inventories of new homes averaged 11 months' supply from March to June, the highest three-month level on record, and existing-homes inventories weren't far behind at 10.8 months' supply in May.

Even though current inflation concerns may have suggested the Fed would remove any expectation of near-term Federal Fund rates below its current 2 percent level, the futures market is now pricing in a 52 percent chance of a 25-basis-point increase by the Sept. 16 meeting and a 32 percent chance of a 50-basis- point increase by Oct. 29.

While inflation is being driven not by strong consumer demand in the U.S. but by commodity-price increases caused by other forces, the Fed must ask whether it really makes sense to raise interest rates in an economy where a weak labor market means little prospect of a wage push, and consumer confidence and housing prices are plummeting.

Not in my book -- unless there is a lot more evidence of a strengthening economy between now and the next FOMC get-together. Or at least more than we saw between the previous two meetings.

(Gene Sperling, formerly President Bill Clinton's top economic adviser, is a Bloomberg News columnist. He is a senior fellow at the Center for American Progress and advised Hillary Clinton in her bid for the 2008 presidential nomination. The opinions expressed are his own.)

To contact the writer of this column: Gene Sperling in Washington at gsperling@cfr.org

Last Updated: July 3, 2008 00:01 EDT