Viewing the US Outlook in the Light of Four Fed "Wishes":
Curb the Stock Market, Slow Consumption, Curtail Economic Growth, and Nip Budding Inflation
Analysis by Gary L. Ciminero </thoughts/archive/bios.asp?Author=Gary+Ciminero>
Written July 27, 1999
By raising the Fed </fed/fed_main.stm> funds rate a quarter-point last month to 5% the Fed "took back" one of last year's three quarter-point rate cuts, while at the same time, retreating from May's "tightening bias" back to a neutral stance.
A key question arises: Does a resumed neutral stance mean the Fed's tightening work is now completed and there is little likelihood for rate hikes in the future, as some optimists suggest? We doubt it and look for at least one more quarter-point hike in Fed funds by the October FOMC meeting </economy/releases/fomc_meeting.asp>.
Clear confirmation that the Fed's tightening work is not yet done came from the most reliable of sources last Thursday, Fed Chairman Allan Greenspan. Lest anyone think that June's resumption of a neutral stance meant no tightening ahead, the Chairman said in his Humphrey Hawkins Testimony </fed/testimony/testimony_072299.stm>,
"If new data suggests it is likely that the pace of cost and price increases will be picking up, the Federal Reserve will have to act promptly and forcefully so as to preclude imbalances from arising that would only require a more disruptive adjustment later ..."
If the above statement were not enough to disabuse false hopes that June's neutral stance means no more tightening lies ahead, Greenspan said later in his testimony that [emphasis added],
" ... by its June meeting the FOMC was of the view that the full extent of this insurance [referring to last fall's easing moves as "insurance" against contemporaneous international and US liquidity risks] was no longer needed. It also did not believe that its recent modest tightening would put the risks of inflation going forward completely into balance."
In particular, the June tightening move was aimed at slowing the pace of economic growth that the Fed fears threatens inflation </economy/releases/cpi.asp>. Yet the increase in the Funds rate was followed by rejoicing in the stock market, accompanied by another ascent in consumer confidence </economy/releases/consumer.asp> and spending. These reactions were hardly what Greenspan and his FOMC desired.
Yet current inflation gauges remain muted. Sharp downward reversals in oil product prices contributed mightily to June's flat consumer price inflation </economy/releases/cpi.asp>, cutting producer prices </economy/releases/ppi.asp> as well. Also, the "core CPI", excluding energy and food price, showed minimal inflation in both May and June.
Of course, no one thinks that energy will deliver lower inflation this month and next. Quite the opposite: crude oil prices are back toward $20/bbl. of late, engineered by production cuts of OPEC and friends. This means that the CPI and PPI will again be fighting against rising oil prices in the months ahead, which if accompanied by escalating labor costs, will easily push the CPI trend toward 2«% by year-end.
More pessimistic inflation news has been evident from the National Association of Purchasing Management </economy/releases/napm.asp>. (cont)
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