The Fed is caught in the middle of conflicting economic data. In a statement accompanying their decision to increase interest rates, they say;
Fed wrote:
Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices.
and
Fed wrote:
Pressures on inflation have picked up in recent months and pricing power is more evident. Longer-term inflation expectations remain well contained.
(Their emphasis not mine.)
and
Fed wrote:
...the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.
Quite a lot could be read into their short statement;
1. The Fed is currently hawkish wrt inflation, ie. it wont hold back from increasing rates even though spending is slowing. The data may be conflicting, but the Fed's response is to raise rates. This shows that their primary objective is to keep control of inflation even if it further exasperates a downturn in growth.
2. This is not real stagflation - it's very mild stagflation. Stagflationesque, but not full-on stagflation.
3. Their emphasis on "Longer-term inflation expectations remain well contained" is odd. Suggestions anyone?
4. The Fed obviously believes that the data influencing their decision to hike rates is not an anomaly. They must believe that the data is real and has to be acted upon.
Joined: May 22, 2004 Posts: 1424 Location: Ottawa, Ontario
Posted: Tue May 03, 2005 8:37 pm Post subject:
Quote:
3. Their emphasis on "Longer-term inflation expectations remain well contained" is odd. Suggestions anyone?
I think what they are hinting at is the inability of workers to demand compensatory increases in their wages. Workers are in a very poor position to negotiate higher wages. First there is China and foreign competition, second there are illegal immigrants and third the workers are not organized and their issues are hardly making an impression on the political agenda.
So instead of higher commodity prices feeding through into persistent inflationary expectations like in the 1970s all that will happen is the cost of everything will go up and the middleclass will get poorer. _________________ Biofuels: The "What else we got to burn?" answer to peak oil.
So instead of higher commodity prices feeding through into persistent inflationary expectations like in the 1970s all that will happen is the cost of everything will go up and the middleclass will get poorer.
Bingo! That is exactly the plan.
Great new book, just out: Greenspan's Fraud by Ravi Batra _________________ "The world is changed... I feel it in the water... I feel it in the earth... I smell it in the air... Much that once was, is lost..." - Galadriel
Joined: Oct 23, 2004 Posts: 5922 Location: New Jersey
Posted: Tue May 03, 2005 9:29 pm Post subject: Re: The Feds response to mild stagflation
spot5050 wrote:
Fed wrote:
Pressures on inflation have picked up in recent months and pricing power is more evident. Longer-term inflation expectations remain well contained.
(Their emphasis not mine.)
What are "Words" for?
The Fed made a unusual revision to its FOMC statement just before the market close. Being that they intentionally created buying panic in the market before with rate cuts, it does not stretch credibility to think this revised statement was an intentional ploy. But what do the words "Longer-term inflation expectations remain well contained" mean?
Actually, not very much.
The Fed previously informed us that it samples market expectations by reviewing bond markets rates, especially on inflation adjusted securities, to gauge 'longer-term inflation expectations'. Bond market participants don't expect much more long term inflation than there exists now. But who is the biggest participant in the bond markets? Foreigners in general and more specifically - foreign central banks. For the most part, they are insensitive to current market price.
So if stock market investors react to a statement that means almost nothing, then the Fed is right that a "words" policy is sometimes more important than what really is happening. Words policy is the belief by the Fed that providing words to direct the markets is important part of keeping those markets stable. Stability of the markets has ascended in importance in recent years to a prime Fed objective.
The words policy may work for a short while. However, over reliance on the words policy is dangerous - because the next time the words are changed or if the Fed makes any policy moves that will reflect the coming deterioration in the economy, panic may set in much faster than we have ever seen before.
Joined: Dec 07, 2004 Posts: 482 Location: Cheshire, England
Posted: Wed May 04, 2005 5:33 pm Post subject:
spot wrote:
3. Their emphasis on "Longer-term inflation expectations remain well contained" is odd. Suggestions anyone?
Sadly I've just realised the answer to my own question.
Q. Why did the Fed emphasise that part of their press release?
A. Because they produced one press release but through editing problems they missed a bit out. I was quoting from the second press release so the bold part is the bit they missed out.
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