Recent news that the Consumer Price Index (CPI) rose 1.6% YoY which was 0.6% YoY higher than the previous reading and the strongest reading in the last six months has re-ignited concern that the ultra-low interest rate policy the Fed has pursued since the financial crisis will result in an inflationary environment which will be tough to stop once it starts.

“As we move away from the low inflation rate of the fall, Fed officials who are concerned about deflation will take a little bit of comfort”, was how Conrad DeQuadros of RDQ Economics described it.

A diminishing risk of deflation is different than the risk of rampant inflation to be sure and Brian Jacobson, chief portfolio strategist at Well Fargo Management LLC is sanguine on the latter saying that the hawks at the Fed “are probably going to be beating a drum that not many people are going to be marching to”.

If there is dissention at the Fed over inflation, Gabriel Mann and William O’Donnell, rate strategists at RBS believe that that is only one of a few topics on which the Fed Governors disagree.  “It seems that the Fed is far from finding a consensus on at least two very critical questions: 1) how to proceed with the forward guidance and 2) how to interpret the drop in the unemployment rate.”  Additionally, the RBS team sees the 10-yr yield as range bound between 2.60% and 2.82% with only a very small chance of hitting 2.90%.

Minutes from the latest Fed meeting show officials agreeing that “it would soon be appropriate” for some adjustment in guidance but there was little if any clarity as to how to change it.  “Our forward guidance should be aimed at providing the public with a good understanding of the key drivers of our policy decisions”, John Williams, San Francisco Fed President said adding, “This is best done by trying to explain how we are likely to react to economic developments, rather than putting down specific, quantitative markers for future policy decisions.”

Conflicting opinions and data are not exclusive to the Fed.  January housing starts fell 16% to a seasonally adjusted annual rate of 880,000, the lowest level since September and building permits fell 5.4%.  While the argument could be made that the weather was a factor in actual starts, that permits fell is a little more troubling.

The weather this winter also seems to be having and outsized effect on small businesses.  Maureen Anderson, owner of Carpet Fair, Inc., a Baltimore area floor covering retailer with six locations said that sales were down 16% so far in February over the same period last year.  “There’s a direct correlation, especially in my business”, Maureen stated, “if an appliance breaks or a TV breaks, people want to replace it right away.  If flooring needs to be replaced, they can wait a little bit.”

This would seem to be corroborated by a WSJ/Vistage survey of 727 small business owners and executives showed recently that found that about one in three small business owners across the U.S. say winter storms have forced them to lower their sales outlook for the January to March period.

On the surface these would not seem to be the catalysts for an over-heating, hyper-inflationary economy.

A robust debate can often yield the best results as each side must work that much harder to support their beliefs in the face of contradiction.  That there were debates going on inside the Fed during the financial crisis is now certain as the 1,865 pages of transcripts just released after the customary 5 year lag open a window into what was going on at the Fed during the worst financial calamity of this generation.

The story starts with Chairman Bernanke saying, “I have become increasingly concerned that our policy rate is too high to fully address the downside risks to growth,” on a conference call on January 9^, 2008 and following that up with “We are behind the curve, we need to do something,” at another unscheduled meeting on January 21^st.

Later that same year, April 29^th to be specific, then-New York Fed President Timothy Geithner had a go at his Dallas compatriot, Richard Fischer, who was in favor of strengthening the Dollar via tighter credit policies.  “This speculation is perilous” Mr Geithner said.

Interesting as well is that Janet Yellen, who was then merely the President of the San Fran Fed, seemed to be on the side of the hawks saying on June 25^th, “Our next move on the funds rate is likely to be up, and the question is when.” Adding, “I would envision beginning to remove policy accommodation toward the end of this [2008] year.”

Given that as Chair of the Fed Janet Yellen is now pressing markets to understand that it will probably be late 2015 before the Fed Funds rate rises it would appear that Janet along with Hank Paulson before her is taking a page from John Maynard Keynes when he said, “When the facts change, I change my mind.”

As each new Chair remakes the Fed into their own image we will have to wait, not to change our mind but to make our minds' up as to whether Ms. Yellen is up for the challenge.