This morning -- in the middle of prepared remarks made at Maggiano's Little Italy -- Chicago Federal Reserve Bank President Michael Moskow said that the Fed pays close attention to the inflation expectations of markets. 

There is a direct link between the expectation of inflation and actual inflation, he told the crowd.

When business feels threaten by inflation, it changes its plan of attack to minimize inflation's impact on profits. 

In doing so, Moskow said, inflation can become a self-fulfilling prophecy.

In other words, by preparing for inflation, businesses can make inflation actually happen.  Therefore, part of the FOMC's role is to make pre-emptive policy changes to stop this behavior before it can manifest itself. 

That's weird to me so when the Q & A started, I stepped to the microphone: 

"If the Fed tries to stay one step ahead of business," I asked, "and business tries to stay one step ahead of the Fed -- just who is taking the lead in setting our country's monetary policy? "

More than ever, I am convinced that psychology figures as large in Fed policy as hard data coming from the districts; I wrote a psychological piece about a psychological piece about it in August 2006.

After the August meeting, you'll remember, rampant inflation fears came to a halt because the Fed stopped raising the Fed Funds Rate.  Fait accompli for the Fed.

I had speculated on the Fed's "fake out" move at the time, but now that I've heard Moskow speak, perhaps the theory wasn't a "theory" after all -- it appears to be right out of the Fed Bag of Tricks.

Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.