Markets responded (bond and equity): Fed Governor says pause now "less likely".
<<By Craig Torres and Victor Epstein
May 18 (Bloomberg) -- The Federal Reserve is less likely to
suspend its interest-rate increases after a report yesterday
showed consumer prices rose more than expected, Richmond Fed
President Jeffrey Lacker said.
``The inflation outlook is at the borderline of acceptable
and perhaps moving beyond,'' Lacker told reporters today in
Norfolk, Virginia. ``Unfavorable inflation numbers and adverse movements in inflation expectations are going to require a higher path for real interest rates, and are going to make a pause less likely.''
The Fed is facing rising metals and oil prices just three
months into Chairman Ben. S. Bernanke's term. Minutes after
Lacker spoke, a report from the Philadelphia Fed showed an index of prices paid by manufacturers for energy and other commodities jumped to a seven-month high. Lacker's comments are the first by a Fed official on monetary policy and the economy since the Fed said last week that further rate moves will depend on what incoming data say about growth and prices. Inflation is off to the worst start to a year since 1990, a government report showed yesterday, rising
at an annual rate of 5.1 percent in the first four months.
``Lacker's reading the numbers at face value,'' said Lou
Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. In Lacker's view, ``No matter how much you want to take a nuanced approach, the whole point of a clear strategy is not nuance.''
`Needed to Hear'
The yield on the benchmark 10-year Treasury note fell 5
basis points after the remarks, to 5.09 percent at 1:18 p.m. in New York. The yield, which moves inversely to the note's price, is down from a four-year high of 5.20 percent reached at the start of the week. The yield on the July contract on the federal funds rate climbed to 5.15 percent, pricing in a 60 percent chance of an increase, up from 50 percent yesterday.
``That is what the market needed to hear,'' said John
Roberts, managing director in charge of government bond trading at Barclays Capital Inc. in New York. ``You have seen a dramatic flattening across the yield curve'' as longer-term bond yields fall, narrowing the difference with two-year notes, he added. [snip]
Lacker has never dissented in a vote at the Fed's rate-
setting Open Market Committee since he became head of the
Richmond Fed bank in 2004. ``The Richmond Fed has traditionally had a very hawkish research and policy tradition,'' Crandall said. ``They have also
always taken plain-speaking seriously.'' [snip]
``Core CPI is clearly running near or above the upper end
of the FOMC's comfort zone,'' former Fed governor Laurence Meyer said yesterday in a note to clients of his firm Macroeconomic Advisers LLC. ``We now expect the committee to move to 5.25 on the funds rate'' in June. [snip]
quid |
