Federal Reserve officials may cling this week to their bias for tighter credit, setting themselves up for bigger interest-rate cuts later in the year if the economy continues to lose momentum.
``The Fed is often a little behind the curve when you get to these turning points,'' says J. Alfred Broaddus Jr., president of the Richmond Fed from 1993 to 2004. ``The reluctance to move toward ease once you have an inflation bias in place may be just a fact of life if you are concerned about credibility.''
Fed officials have been very clear in their public speeches over the last few months. All of them -- let me repeat that ALL OF THEM, AS IN EVERY LAST ONE, AS IN NO ONE HAS SAID ANYTHING DIFFERENTLY -- have said inflation is too high.
The Year-over-year CPI number is 2.7% -- way above the Fed's publicly stated inflation target of 1%-2%. That means inflation has to come way down before the Fed will cut rates.
Now, the Fed could change their bias from anti-inflation to growth. But they haven't said that yet.
3 comments:
Bonddad, the Fed will always sound hawkish "until it stops sounding hawkish." This is because rate hikes are "bad news" and rate cuts are "good news." If *everyone* is anticipating rate cuts, then they will not have their desired stimulative effect when they occur. Finally, go back and read the FOMC statements from Nov 00-Jan 01 to see how quickly things can change. We went from a tightening bias to neutral to emergency cuts in the space of 2 months.
http://www.federalreserve.gov/fomc/previouscalendars.htm#2000
I think the fed will do whatever it can to keep the economy from becoming an issue during the 2008 election.
If the situation isn't good by fall 2007, I expect them to cut.
Maybe I'm wrong. But I firmly believe that the Bush administration's overriding concern is to ensure its own support, and I believe it has the influence over the fed to enforce that concern.
Imo the fed doesn't bet on the come, they look at the numbers we have rather than what they anticipate six months down the road, and right now the numbers don't support easing at all.
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