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While the Fed funds futures contract is hinting that the Fed may be just three hikes away from completing this round of rate increases, most Fed governors themselves are not yet contemplating that prospect, at least not publicly. The closest they have come is a vote by the Dallas Fed not to raise rates at the last meeting; that, of course, was offset by another region wanting a 50 basis point rate hike. In addition, one governor noted that there would come a time when the Fed would have to remove the ‘measured’ approach because the Fed simply would not know clearly what needed to be done with rates as it has during the recession and now the recovery. You have to stretch that statement like a fisherman trying to reach a size limit to come to the conclusion the Fed could be contemplating slowing or stopping rate hikes anytime soon.
Friday Fed Governor Kohn did his best to tamp out any idea that the Fed was ready to slow its campaign that the recent FOMC minutes might have sparked. We said right after the FOMC minutes came out that the Fed would hit the road to respond to the notion the market showed that somehow the Fed was taking a softer approach to rate hikes. The title of the speech was enough: ‘Imbalances in the U.S. Economy.’ It cited the housing market, lack of savings, the trade deficit, the budget deficit, and low long-term rates as the imbalances facing the economy. Wow. That is an impressive list. The only real imbalance we see that the Fed should be concerned about is demand over supply because that is what is causing the current inflation. Inflation is not an imbalance; it is the RESULT of an imbalance. When you think about that basic precept, the whole speech is questionable.
Questionable it may be, but it reflects the opinion of a voting member. No wonder the market had a bit more reason to sell Friday afternoon when this speech hit the wire. Kohn was clear that the Fed had more hiking to do (“we have not yet finished this task”) because the FF rate is lower than the level “consistent with the maintenance of stable inflation and full employment”. That latter statement is in line with previous Fed statements to the effect that but for the rate hikes inflation would be running rampant. It is also taken right from the Phillips Curve, the old, historically disproved idea that inflation comes from full employment and prosperity. That is hardly comforting, i.e. that the Fed is again looking at demand issues and economic ‘slack’ as its barometer of rate hiking intensity versus letting the market work.
The speech concluded with additional clear language that the Fed would have to practice tough love if necessary: “But . . . we should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices . . . Nor should we hesitate to raise rates because higher rates mean higher debt-servicing burdens.” Why? Because “it is through such actions that we aim to achieve our objective of economic stability.” Gee, most people think it is the Fed’s job to promote price stability, i.e. keep inflation in check. Now it is taking over economic stability as well. That is no surprise, however, given Greenspan lecturing Congress on social security, Medicare, mortgage programs, and even energy. The Fed, just as the judicial branch, has usurped a lot of territory from the legislative branch that it now calls its own. Now it looks as if we have four branches of government (arranged in order of power): judiciary, legislative, Federal Reserve, executive.
Friday Fed Governor Kohn did his best to tamp out any idea that the Fed was ready to slow its campaign that the recent FOMC minutes might have sparked. We said right after the FOMC minutes came out that the Fed would hit the road to respond to the notion the market showed that somehow the Fed was taking a softer approach to rate hikes. The title of the speech was enough: ‘Imbalances in the U.S. Economy.’ It cited the housing market, lack of savings, the trade deficit, the budget deficit, and low long-term rates as the imbalances facing the economy. Wow. That is an impressive list. The only real imbalance we see that the Fed should be concerned about is demand over supply because that is what is causing the current inflation. Inflation is not an imbalance; it is the RESULT of an imbalance. When you think about that basic precept, the whole speech is questionable.
Questionable it may be, but it reflects the opinion of a voting member. No wonder the market had a bit more reason to sell Friday afternoon when this speech hit the wire. Kohn was clear that the Fed had more hiking to do (“we have not yet finished this task”) because the FF rate is lower than the level “consistent with the maintenance of stable inflation and full employment”. That latter statement is in line with previous Fed statements to the effect that but for the rate hikes inflation would be running rampant. It is also taken right from the Phillips Curve, the old, historically disproved idea that inflation comes from full employment and prosperity. That is hardly comforting, i.e. that the Fed is again looking at demand issues and economic ‘slack’ as its barometer of rate hiking intensity versus letting the market work.
The speech concluded with additional clear language that the Fed would have to practice tough love if necessary: “But . . . we should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices . . . Nor should we hesitate to raise rates because higher rates mean higher debt-servicing burdens.” Why? Because “it is through such actions that we aim to achieve our objective of economic stability.” Gee, most people think it is the Fed’s job to promote price stability, i.e. keep inflation in check. Now it is taking over economic stability as well. That is no surprise, however, given Greenspan lecturing Congress on social security, Medicare, mortgage programs, and even energy. The Fed, just as the judicial branch, has usurped a lot of territory from the legislative branch that it now calls its own. Now it looks as if we have four branches of government (arranged in order of power): judiciary, legislative, Federal Reserve, executive.
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