The tough talk on inflation from Federal Reserve chairman Ben Bernanke and his colleagues is unlikely to lead to a boost in interest rates for now.
Even as central bank officials step up hawkish rhetoric, base rates will likely be held steady at 2.0 percent at a two-day meeting opening Tuesday of the Federal Open Market Committee, most analysts predict.
The Fed appears to be in a box with inflation pressures heating up even as the economy teeters on the brink of recession. The central bank has slashed rates since last September by 3.25 percentage points in an effort to fire up growth, but officials appear to be signaling that cycle of cuts is over, and that inflation is now the biggest threat.
"The Fed is approaching a danger point, in our opinion," said Ethan Harris, senior economist at Lehman Brothers. "It is very unusual for it to contemplate hiking rates when the unemployment rate is steadily moving above its inflation-neutral level. Moreover, the rise in inflation expectations is clearly due to surging commodity prices, not an economic overheating."
David Kotok, chairman of Cumberland Advisors, said the Fed "will not raise interest rates this year, at least not until after the (November presidential) election." Kotok said the US economy is facing a commodity-driven inflation surge rather than a wage-driven push, and that monetary policy would do little to check these prices.
"The energy price shock is not something that the Fed can control," he said. Moreover, he said that because more consumer income is going to pay fuel bills, the effect of high oil prices is "deflationary, not inflationary." Similarly, Kotok said higher food prices would see little impact from rate hikes.
The analyst also said the Fed does not want to risk being seen as injecting itself in politics during a presidential campaign and will most likely refrain from any major actions until the election is over.
"The Fed normally does not raise interest rates preceding a national election," he said. "This time they are a beleaguered body and threatened by politics unlike in any recent period of history. Politics has injected a wild card into the Fed decision making. We expect that the Fed will stay on hold until after the election and keep its profile low in September and October."
From a purely economic perspective, many analysts argue that conditions are too fragile for higher interest rates. The housing crisis remains in full swing and credit markets are still vulnerable to a shock, some argue.
"If the Fed now regrets having lowered the federal funds rate while providing so much liquidity, might raising the federal funds rate now exacerbate the credit crisis and the recession? I think so," said Ed Yardeni at Yardeni Research.
Still, Bernanke and other Fed officials have been signaling they will take steps to keep inflation expectations from getting out of control. Bernanke said earlier this month that any shift in public expectations in inflation could be self-fulfilling by prompting workers to demand higher wages and businesses to pass on price increases.
"It's 'high noon' and Sheriff Bernanke is waiting with gun holstered, waiting for rapid inflation," said Scott Anderson, senior economist at Wells Fargo. "The problem is he may actually have to do battle if oil prices do not recede or stabilize soon. I call this a problem, because I'm not sure if the town is ready for this event, so soon after Sheriff Bernanke had to chase off the financial market crisis gang from taking over the town."
Some say the Fed is trying to "jawbone" public expectations in what amounts to a bluff on hiking rates. "The Fed is now battling inflation expectations, not inflation itself," said Joel Naroff at Naroff Economic Advisors.
"The first step in that war is jawboning, which is going on like crazy. We will not likely see the next action, rate hikes, until late in this year at the earliest." Naroff said the latest economic data "do not tell us the economy has stabilized to the point where the Fed would have any cover to raise rates."
Even as central bank officials step up hawkish rhetoric, base rates will likely be held steady at 2.0 percent at a two-day meeting opening Tuesday of the Federal Open Market Committee, most analysts predict.
The Fed appears to be in a box with inflation pressures heating up even as the economy teeters on the brink of recession. The central bank has slashed rates since last September by 3.25 percentage points in an effort to fire up growth, but officials appear to be signaling that cycle of cuts is over, and that inflation is now the biggest threat.
"The Fed is approaching a danger point, in our opinion," said Ethan Harris, senior economist at Lehman Brothers. "It is very unusual for it to contemplate hiking rates when the unemployment rate is steadily moving above its inflation-neutral level. Moreover, the rise in inflation expectations is clearly due to surging commodity prices, not an economic overheating."
David Kotok, chairman of Cumberland Advisors, said the Fed "will not raise interest rates this year, at least not until after the (November presidential) election." Kotok said the US economy is facing a commodity-driven inflation surge rather than a wage-driven push, and that monetary policy would do little to check these prices.
"The energy price shock is not something that the Fed can control," he said. Moreover, he said that because more consumer income is going to pay fuel bills, the effect of high oil prices is "deflationary, not inflationary." Similarly, Kotok said higher food prices would see little impact from rate hikes.
The analyst also said the Fed does not want to risk being seen as injecting itself in politics during a presidential campaign and will most likely refrain from any major actions until the election is over.
"The Fed normally does not raise interest rates preceding a national election," he said. "This time they are a beleaguered body and threatened by politics unlike in any recent period of history. Politics has injected a wild card into the Fed decision making. We expect that the Fed will stay on hold until after the election and keep its profile low in September and October."
From a purely economic perspective, many analysts argue that conditions are too fragile for higher interest rates. The housing crisis remains in full swing and credit markets are still vulnerable to a shock, some argue.
"If the Fed now regrets having lowered the federal funds rate while providing so much liquidity, might raising the federal funds rate now exacerbate the credit crisis and the recession? I think so," said Ed Yardeni at Yardeni Research.
Still, Bernanke and other Fed officials have been signaling they will take steps to keep inflation expectations from getting out of control. Bernanke said earlier this month that any shift in public expectations in inflation could be self-fulfilling by prompting workers to demand higher wages and businesses to pass on price increases.
"It's 'high noon' and Sheriff Bernanke is waiting with gun holstered, waiting for rapid inflation," said Scott Anderson, senior economist at Wells Fargo. "The problem is he may actually have to do battle if oil prices do not recede or stabilize soon. I call this a problem, because I'm not sure if the town is ready for this event, so soon after Sheriff Bernanke had to chase off the financial market crisis gang from taking over the town."
Some say the Fed is trying to "jawbone" public expectations in what amounts to a bluff on hiking rates. "The Fed is now battling inflation expectations, not inflation itself," said Joel Naroff at Naroff Economic Advisors.
"The first step in that war is jawboning, which is going on like crazy. We will not likely see the next action, rate hikes, until late in this year at the earliest." Naroff said the latest economic data "do not tell us the economy has stabilized to the point where the Fed would have any cover to raise rates."
No comments:
Post a Comment