Fed in a Quandary
Mike "Mish" Shedlock
Jun 1, 2006
The minutes
of May 10 FOMC meeting were released today [Wed].
Here are a few key snips:
Participants discussed in some
detail inflation expectations--a potentially important factor
influencing future inflation trends. Some surveys suggested that
inflation expectations had risen in recent weeks, but others
implied that expectations were little changed.
On balance, participants judged that inflation expectations had
risen somewhat--a development that would have to be taken into
account in policymaking and warranted close monitoring--but remained
contained.
Although the Committee discussed policy approaches ranging from
leaving the stance of policy unchanged at this meeting to increasing
the federal funds rate 50 basis points, all members believed
that an additional 25 basis point firming of policy was appropriate
today to keep inflation from rising and promote sustainable economic
expansion.
Recent price developments argued for another firming step at
today's meeting. Core inflation recently had been a bit higher
than had been expected, and several members remarked that core
inflation was now around the upper end of what they viewed as
an acceptable range. Moreover, a number of factors were augmenting
the upside risks to inflation: the surge in energy and commodity
prices, some recent weakness in the foreign exchange value of
the dollar, and the possibility that the apparent increase in
inflation expectations could, if it persisted, impart momentum
to inflation.
At the same time, members also
saw downside risks to economic activity. For example, the cumulative
effect of past monetary policy actions and the recent rise in
longer-term interest rates on housing activity and prices could
turn out to be larger than expected. Still, it seemed most likely
that, with modest further policy action, including a 25 basis
point firming today, growth in activity would moderate gradually
over coming quarters, pressures on resources would remain limited,
and core inflation would stay close to levels experienced over
the past year.
Given the risks to growth and inflation, Committee members were
uncertain about how much, if any, further tightening would be
needed after today's action. In view of the risk that the outlook
for inflation could worsen, the Committee decided to repeat the
indication in the policy statement released after the March meeting
that some further policy firming could be required.
Members debated the appropriate characterization of inflation
expectations in the statement. Low and stable inflation expectations
were key to the attainment of the Committee's dual objectives
of price stability and maximum sustainable economic growth. However,
the apparent pickup in longer-term expectations, while worrisome,
was relatively small. They remained within the range seen over
the past couple of years, and the increase could well reverse
before long. Accordingly, it appeared appropriate to characterize
inflation expectations again as "contained."
Dow Jones summed it up as
follows:
*DJ FOMC: May Minutes: Upside
Inflation, Downside Econ Risks
*DJ FOMC: Debate Ranged From No Fed Funds Change To 50BP Hike
*DJ FOMC: Rise In Price Expectations 'Worrisome' But Small
*DJ FOMC: Inflation Expectations Warrant 'Close Monitoring'
*DJ FOMC: Staff Forecasts Inflation To Slow Later In '06
*DJ FOMC: Unsure How Much 'If Any' More Tightening Needed
*DJ FOMC: Lagged Rate Impact On Housing Could Be Larger
*DJ FOMC: Lower Dollar Could Add To Inflation Pressures
Fed in a Box
Those minutes prove the Fed
is in a box and is essentially clueless about what to do. Some
wanted to pause while others wanted a 50BP hike. In the end they
all agreed to go down on the sinking ship together by agreeing
to agree. It was a unanimous vote in favor of a 25 BP hike.
At least in the UK we see policy makers willing to dissent. The
last BOE meeting had a three way split with some voting to pause,
some to hike, and one to cut.
It is notable that finally after 16 consecutive rate hikes the
Fed finally put a 50 basis point rate hike on the table just
as housing is getting crucified in many places. They are also
worried about inflation expectations while at the same time unsure
if any more hikes are needed.
I have said it before and will repeat it again. The lagging effects
of 16 consecutive hikes, in light of action in housing as well
as rising bankruptcies makes it extremely likely the Fed has
already overshot.
Given that this Fed created the housing bubble in the wake of
a stock market bubble the Fed also helped create, why anyone
thinks the Fed has any clue what they are doing is simply beyond
me. Past bubbles and those minutes clearly prove the Fed is guessing.
Then again, given that the greatest liquidity experiment in the
history of mankind was openly undertaken by numerous central
banks over the last few years (most notably the Fed and the BOJ)
it should not be too surprising that the Fed is guessing.
We can top that off with $Ben Bernanke who actually believes
price targeting can work in a global economy burdened by peak
oil, outsourcing, trillions of dollars of derivatives floating
around, and interest rates ranging from 0% in Japan to 2% in
Europe to 5% in the US. All I can say is that it can't be done.
Bernanke is the wrong person for the wrong job at the wrong time.
For more discussion on the silliness of price targeting, please
consider Inflation
Monster Captured. Targeting prices is like trying to catch
your tail. The job is wrong because the job should not exist.
The man is wrong because price targeting can't work. The time
is wrong simply because it was never right and never will be.
The Fed should be abolished and the market should set rates.
The market can not possibly do any worse than the bubbles blown
by the Greenspan and Bernanke Fed.
The Fed is in a quandary because of the mess they helped create.
There are no good solutions from here, yet the talk from Wall
Street is as if some sort of miracle soft landing that keeps
the consumer spending without going bankrupt is about ready to
happen. No chance.
May 31, 2006
Mike Shedlock "Mish"
email: Mish
http://globaleconomicanalysis.blogspot.com/
321gold Inc
|
