June 27 (Bloomberg) -- Wouldn't it be nice to read the headline, ``Fed Does Nothing, Says Same Old Thing''?

At minimum, it would accurately describe the outcome of the Federal Reserve's policy meeting Wednesday. Fed chief Ben Bernanke and his team have been telling us for weeks that ``upside risks to inflation and inflation expectations have increased'' while ``downside risks to growth have diminished.''

Instead -- and this isn't entirely the Fed's fault -- we're treated to a nuanced dissection of the statement, complete with highlighted text indicating any adverbial alterations from the previous meeting, and an in-depth analysis of the relative degree of concern about the risks of inflation and growth.

Maybe Bill Poole, the recently retired president of the St. Louis Fed, was right when he said earlier this year that the Fed can't provide what the market wants because it's not clairvoyant.

In other words, it's better to be clear about what you do know than vague about what you don't.

With that in mind, consider the different reactions and responses to this week's Fed statement:

Some economists read it as a sign policy makers were ``moving the needle'' toward future rate increases.

Others said they nudged the talk needle, and not much else.

Interest-rate futures prices heard something different and rallied, paring expectations for a rate increase in August and September.

Then there's the issue of inflation expectations, which are more of a concern to policy makers than consumers.

Lower Living Standard

``In previous cycles, consumer expectations about their financial well-being did not collapse when inflation went up,'' said Neal Soss, chief economist at Credit Suisse. This time around, according to the Reuters/University of Michigan Survey of Consumers, rising inflation expectations are being met with ``a collapse in expectations about their own financial futures, suggesting consumers don't expect to be compensated for higher prices with higher wages,'' Soss said.

Consumers' inflation expectations one year out rose to a 27- year high of 5.2 percent in May, according to the survey. Even so, ``the majority of all households expected a declining inflation-adjusted income during the year ahead,'' the survey said.

The Fed's fears of a wage-price spiral in the U.S. seem to be a relic of another era. While inflation is always and everywhere a monetary phenomenon, in the words of the late Nobel laureate Milton Friedman, the structure of the economy and transmission mechanism of inflation have changed, Soss said.

Transmission Mechanism

``There are two important differences between the inflation process in the 1970s and now,'' he said. ``First, the price shocks in the '70s were generalized because they were reflected in wages. Nobody gets a raise today to compensate for the higher cost of gasoline.''

Union membership is small today -- 12 percent of the workforce last year -- compared with almost 30 percent in 1970. Cost-of-living adjustments aren't automatic.

``Second, the inflation of the 1970s was supported by inventory accumulation,'' Soss said. ``We're not seeing signs of that now, most likely because credit isn't available.''

Consumers can expect higher inflation all they want, but inflation expectations can't become inflation reality without some transmission mechanism.

Credit is harder to get, and consumers are increasingly falling behind on credit card payments in addition to their interest on mortgages and auto loans.

It doesn't sound like an environment where consumers are willing or able to borrow to buy real assets to guard against the falling dollar and higher inflation.

1990s Redux

The situation is starting to look increasingly like the early 1990s, when ``the Fed slashes the cost of credit to financial institutions, but these institutions aren't in a position to re-lend this cheap Fed credit to the private sector because of capital inadequacy,'' said Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago.

In a June 20 commentary, Kasriel bolstered his argument by pointing to the contraction in bank credit in the last three months, the sharp deceleration in deposit growth (shrinking assets mean reduced funding needs) and the slowdown in broad money growth (M2) in the last quarter.

``The implication is that real economic activity is likely to be very sluggish until financial institutions rebuild their capital positions,'' Kasriel said.

Banks have raised $320 billion of new capital in the past year to offset losses and writedowns of $400 billion. There's more to come, judging by the dive in the Standard & Poor's 500 Financial Index to a 5-year low.

Kasriel expects another benefit from slower money and credit growth.

``The inflationary flames are likely to subside as they are deprived of the oxygen,'' he said.

That's certainly a contrarian view -- and one the Fed would welcome. Instead of expecting ``inflation to moderate'' month after month, policy makers could use a little inflation- moderation reality.

(Caroline Baum, author of ``Just What I Said,'' is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.

Last Updated: June 27, 2008 00:00 EDT