Fed isn't spooked by Credit Market Woes

I thought that the text of the Fed's release today was exactly what the market needed. The statement acknowledged all of the fears that investors have -- housing downturn, market volatility, credit conditions -- but stuck to its guns on inflation. What the Fed was essentially saying is that all the other concerns are important but are more transitory in nature and don't pose a significant enough threat for the Fed to change its bias. After a brief dip following the release of the statement, the S&P 500 took the encouraging words to heart and finished the day up over half a percent. Here is the text:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.

I couldn't have said it better myself. The credit crunch and the housing downturn make a lot of news and grab a lot of headlines but there is still no substantial evidence of significant contagion. While I agree with this view, I think Jim Cramer may be a little bit disappointed with the Fed's take.