Hi Paulo: I do not pay a great deal of attention to the press. I read the last two years of the FOMC minutes posted at the Fed homepage. Based on the published minutes, there are at least two things on their minds. First is the concern about the potential for wage inflation. For example, look at the following quotes from the 9/30/97 FOMC meeting.
"However, the growing tightness in labor markets in many parts of the country was being accompanied by some signs of rising pressures on labor compensation, including the use of special bonuses and other innovative compensation initiatives that are not included in the usual statistical measures of labor costs."
"There were, nonetheless, a number of reasons for delaying a tightening of policy. The behavior of inflation had been unexpectedly benign for an extended period of time for reasons that were not fully understood. "
"Moreover, final demands had been unexpectedly strong, with economic activity and the associated demand for labor expanding at an unsustainable pace for some time, and it was unclear whether without policy action overall demands would moderate sufficiently to avoid increasing pressures on resources. In the circumstances, the risks to the economy appeared to be strongly tilted toward rising inflation whose emergence would in turn threaten the sustainability of the expansion."
Second, from the same 9/30/97 minutes there is an expectation that the currency devaluations may slow the economy. That can be seen from the following quote.
"The rate of expansion might subsequently be expected to slow as stocks of business capital and consumer durable goods built up relative to sales and incomes, inventory investment moderated somewhat, and the recent strength of the dollar began to exert a drag on exports. It was an open question, however, as to whether these influences would be sufficient to slow the growth of demands for goods and services to a more sustainable pace, and many members suggested that the risks to the forecast were on the side of increases in final demands that would press more intensely against the available resources. "
Since these minutes, which are the latest available, we had the Friday employment news and further support for a potential slowdown due to the strength of the dollar. As you can see from the FOMC quotes, they have questions of their own. I am not questioning their intelligence. I only see the difficult choices that they have to consider. Should they raise rates this month, nip inflation before it gets entrenched in the labor markets, and possibly add to a potential slowdown? Should they let rates remain where they are and risk the possibility of embedded wage inflation down the road? |
