The Fed today decided not to raise rates, and to keep it at 5.25. Not to put too fine a point on it, but I suspect that Bernanke has just done himself severe damage. As the new Fed chief he needed to establish his credibility and his infaltion fighting credentials.

The justification, of course, is that GDP growth came in much lower than expected, and that is considered evidence that the economy is moderating and therefore inflation should moderate.

Here are the headline inflation graphs:

All Inflation

Inflation without Energy or Food ("core" Inflation)

What these charts show is that infalation isn't noticeably faltering. Nor is there any real reason to expect it to. Any additional money in the system is now going into speculation, and until the money is drained out of the system, it will continue to do so since the highest returns are currently in commodity speculation. Furthermore the US dollar is under significant pressure. The increases in 2005 were based on the fact that the US was raising interest rates while Europe and Japan had low rates. Europe and Japan are now in a tightening cycle, and the US has just chosen to pause raises.

Investors aren't likely to see the failure to raise rates as anything but a sign that the tightening cycle is likely over, at least until the end of the year (and the election). And given US trade and current account deficits, as well as significant moves by other central banks to reduce their dollar exposure, currency risk has become significant in holding US dollars.

And if the US dollar drops that will show up as inflation, especially given the US dependence of foreign imports.

Failure to continue raising rates is failure to deal with inflation. And, frankly, it's not going to stop a hard landing for the economy, at best. What it will do, in my opinion, is lead to a recession with the added bonus of bad inflation.

And when Bernanke finally is forced to tighten properly to smash inflation flat, he will have to do so much more viciously than if he had done it now. First because he will be even further behind the curve. Second because the markets will not grant him credibility. And third because he will have to raise rates to support the US dollar.