Economists React to Fed

Yesterday, the the Federal Reserve Open Market Committee surprsied nobody with their 12th consecutive 1/4 point increase. The WSJ noted that further "increases appears unlikely to cease anytime soon," and that the Fed "restated its long-running view that "policy accommodation can be removed at a pace that is likely to be measured." (See Parsing the FOMC Statement)

This must be conusing as all hell to the No Inflation crowd. After all, if its only the core, why raise rates? Especially after the Fed’s policy on bubbles is that its easier to clean them up afterwards than to identify and unwind them in real time.

Given this apparent (warning: sarcasm ahead) lack of inflation, let’s have a look at what the dismal crew had to say, via the WSJ:
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Bernanke, if confirmed, will face a decided tightrope act starting immediately. Will he earn his inflation-fighting stripes and continue down the path Greenspan started? Or will he bow to the concerns of the consumer and take a pause at his first official meeting? If the core inflation data remains as benign as it has been AND we get some mediocre holiday numbers, we think Bernanke would be wise to reevaluate the situation, and be leery of risking ‘inverting the yield curve’ in the 1Q of 2006.

— John B. Norris, Morgan Asset Management

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It seems clear that policymakers are not looking to send any new signals at this point. With the markets only recently having come around to pricing in a reasonable Fed path, the last thing the FOMC wants is to trigger a whipsaw in sentiment. No doubt, there was further discussion at this meeting regarding the appropriateness of providing forward looking guidance as the fed funds rate approaches the neutral zone. We suspect that the official statement will undergo significant change in the not too distant future, but the Fed is justifiably wary about implementing such a shift at this point due to a fear that it could be misinterpreted.

— David Greenlaw, Morgan Stanley

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This statement suggests that Greenspan’s JEC testimony on Thursday is unlikely to contain any significant new message on monetary policy. We continue to look for quarter-point hikes at the December 13th and January 31st FOMC meetings and we expect that Bernanke will continue with further rate hikes in the Spring.

— John Ryding, Conrad DeQuadros, Elena Volovelsky, of Bear Stearns

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There is a small change in the language relating to inflation from Sep 20: The Fed remains concerned that the "cumulative rise in energy and other costs have the potential to add to inflation pressures." "Cumulative" is new, and presumably is intended to mean that the dip in energy prices over the past couple of months is not enough to assuage inflation fears.

— Ian Shepherdson, High Frequency Economics

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"The cumulative rise…" sounds like an acknowledgement that what we have experienced so far is not a one-off event and not something that can be ignored. I am guessing that this word was very carefully chosen to give the right tone to the message. It’s as if they are saying that now is not the right time to let our guard down. It does, after all, take time for these changes to work through the economy. If pressure is building now, it may be a few months before it affects the headline CPI in a big way. The heating season is ahead. The rate hikes are not over.

— William Polley, Western Illinois University

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Recent indicators point to a rebound in manufacturing output from a temporary hurricane-induced setback in the month of September. Consumers — who have been "shell-shocked" by higher gasoline prices and utility costs — pulled in their horns on consumption in September and October. This sets the stage for a modest expenditure growth slowdown in the fourth quarter, providing support for the Federal Reserve’s very gradual approach to adjusting rates.

— Brian Bethune, Global Insight

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The message from the FOMC continues to be that their central case scenario remains one where the tightening process will continue. Going forward, should Fed officials start to feel that the current pace of tightening needs to be altered, we would expect them to prepare markets for that event through public comments. Therefore, unless steered otherwise by Fed-speak, it seems sensible to expect further 25bp tightening moves at upcoming meetings.

— Joshua Shapiro, MFR Inc.

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Source:
Economists React
November 1, 2005 3:47 p.m.
http://online.wsj.com/article/SB113087382159085419.html