Tuesday, May 22, 2007

Fed's Lacker Is Concerned About Inflation

From CNBC:

However, Lacker, one of the Fed's toughest inflation hawks, said he'd like to see the inflation rate come down a bit more. Although he is not a voting member of the Fed this year, Lacker dissented four times last year from the majority at the Fed who wanted to keep interest rates unchanged instead of raising them.

“I don’t think the moderation we’ve seen is statistically significant,” he said. “The core inflation has been fluctuating between 2% and 2.5% for two years now and before that from 1996 through 2003, core inflation was between 1% and 2%. We need to get back to containing core inflation between 1% and 2%.”

I have to admit, the following statement made me laugh.

Still, the Fed official believes the economy and consumers can handle higher gasoline prices. He said his major concern is that the public has become “conditioned” to the idea that higher oil and gasoline prices equal higher inflation.

“That does not have to be true," he said. "It is a matter of relative price changes that go on all the time in a healthy economy. Lacker said he was worried that rising gasoline prices will prompt an uptick in inflation expectations.

Obviously, Lacker wasn't aware that Wal-Mart had a big sales decline recently, which they attributed in part to higher gas prices.

In addition, the average consumer probably isn't thinking relative prices when they fill up at the pump. What they are thinking about is "this is getting pretty expensive."

Any questions? I've been adamant in my stance that the Fed won't lower interest rates anytime soon. While the economy is growing below it's full potential, the inflation rate is still higher than the Fed wants it to be. As a result, don't expect a rate cut anytime soon.