June 9, 2009 - Your mission, should you decide to accept it, Mr. Phelps, is to boost the economy and increase employment but not allow inflation to run rampant. As usual, the secretary will disavow any knowledge of your actions should you fail. This message will self-destruct in 5 seconds. Good luck, Mr. Phelps. Or should that be Mr. Bernanke?

It's hard to say. But investors haven't missed the fact that there's a lot more money available to buy the same amount or fewer goods. Commodity prices are rocketing. The price of oil has doubled in 4 months, now trading at almost $70 a barrel. Commodity prices, in general, were up a record 20% in May and still headed higher. Gold and silver lead the way.

Bank reserves are another tell tale indicator of money in the system. Last year reserves were $11 billion. Today they're $900 billion. Once the banks start lending in volume, the money supply grow even faster.

The Fed isn't asleep at the switch when it comes to inflation. It's already talking about tightening interest rates. Of course, when the stated yield on three month bills is close to zero it's hard to loosen them any further. On the other hand, tightening will surely slow any recovery.

More money will be pumped into the economy. There is no choice. With unemployment at 9.4%, purchasing power has been greatly diminished, not only by consumers without jobs but by consumers with jobs who are afraid of losing them. The next major push in the stimulus package is to create or save 600,000 jobs this summer. That takes more money. The projects: rehabilitate 98 airports, 1500 highways, construct 200 new waste and water systems in rural locations, and put 125,000 young people to work in summer jobs through the Labor Department. The administration claims the stimulus act will save or create more than 3 million jobs over 2 years.

Republicans are quick to point out that since the President signed the stimulus package, 1.5 million jobs have been lost and the unemployment rate is at a 26 year high.

With more government spending on the horizon, it's impossible not to imagine inflation coming back. Maybe in a big way. Yet the Fed is saying it has a plan that incorporates all of the new funding and that inflation won't be a problem. One weapon it can use is tightening interest rates. But if it does, that will certainly slow any recovery as fewer businesses qualify for loans or home buyers don't qualify for mortgages.

It's a fine line for the Fed to walk. If it can pump in all this stimulus money and control inflation, they will have accomplished a true mission impossible. In the meantime, investors aren't waiting to see whether it can be done. They're buying inflation resistant assets like real estate and commodities. They may be too far ahead of the inflation curve, but if they're right, these prices will seem like real bargains.

- Ted Allrich