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Has the Federal Reserve Lost Control? April 28, 2006 |
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Three major events have unfolded in last three days: 1. G-7 countries havs called for appreciation in Asian currencies with respect to dollar. 2. Federal Reserve has announced to not raise interest rates after May 2006, while noting the risk of inflation in prices. 3. Prices of commidities including gold and silver have risen dramatically. It seems that tinkering interest rates is not helping price stability, which is a goal of the Federal Reserve. Price of everything precious for existence of life is rising: energy, education, healthcare, oil and even food. What is the degree of prosperity of an average American household, measured by net assets? Is it increasing or decreasing? Without data on net assets of households, we cannot tell the story. But suppressing the truth can shock everyone including those who may not like to collate such data. Systemic shocks can be mass failure of banks, another Great Depression, and any other unthinkable event. This story will continue! Sankarshan Acharya Citizens for Development and Pro-Prosperity.Com What I had guessed a month ago about the Federal Reserve losing control, as written above, is consistent with truth that it was confused as per munutes of the last meeting released today. Sankarshan Acharya, May 31, 2006 \ Fed Members Unsure About Next Interest-Rate Decision (Update6) http://quote.bloomberg.com/apps/news?pid=10000006&sid=aOFgsU7s9O2k&refer=home May 31 (Bloomberg) -- Federal Reserve policy makers were unsure three weeks ago about whether to raise interest rates again. At the same time, they considered the first half-point increase in six years. ``Members were uncertain about how much, if any, further tightening would be needed,'' the Federal Open Market Committee said in records of the May 10 session released today in Washington. A pick-up in inflation expectations was described as both ``worrisome'' and yet ``relatively small.'' The minutes give a picture of deliberations at a Fed that's more undecided about its policy direction than at any time since it began raising rates almost two years ago. Officials meet June 28-29 to assess whether to extend or suspend the cycle of increases, the most aggressive in a quarter-century. ``There's something to cling onto for everyone'' in the market, said Stephen Stanley, chief economist at RBS Greenwich Capital Markets in The dollar rallied and traders lifted bets the central bank will raise its benchmark rate to 5.25 percent at the June meeting. ``People were thinking they were either going to pause or go 25 basis points,'' said Ethan Harris, chief Yields on Treasury notes climbed as some investors seized on the Fed's remarks that inflation expectations may recede as a sign Bernanke may fall behind in the fight to tame inflation. ``The range of opinion within the committee corresponds to the range of opinions in the market,'' The yield on the 10-year Treasury note, rose 5 basis points to 5.13 percent at 4:14 p.m. in The FOMC voted unanimously at the meeting to raise the benchmark rate to 5 percent from 4.75 percent. The Fed has raised the rate from 1 percent in the past two years in an effort to contain inflation and reach a so-called ``neutral'' rate that doesn't choke off economic growth. Difference in Tone In December, the FOMC tried to downplay any expectations for a possible rate increase of more than a quarter percentage point. Members worded the Dec. 13 statement ``to preclude a possible misinterpretation that the Committee now saw a significant possibility of adjusting policy in larger increments in the near future,'' according to minutes of that session. More recently, St. Louis Fed President William Poole said the chance that the fed funds rate may stand at 4.75 percent or 5.5 percent at the end of June couldn't be ruled out, as opposed to the more-likely outcomes of 5 percent or 5.25 percent. Chances of such alternate moves carried a ``small probability.'' ``It would be foolish to put a zero probability'' on those other results, After today's reports, investor expectations increased for the Fed to raise rates again on June 29. On May 10, traders placed a 40 percent probability on such a move, based on the price of futures tied to the fed funds rate on the Chicago Board of Trade; that climbed to 72 percent today, compared with 58 percent yesterday. ``I think there is a little bit of everything in there for everybody,'' said Karl Haeling, vice president at the Forecast for Slowdown The Fed's internal forecast calls for the Bernanke, 52, who took over from Alan Greenspan in February, told Congress last month the Fed may take a break from the rate increases even if inflation remains a risk. ``The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information,'' the FOMC said in its May 10 statement. `Upside Risks' There are few signs that inflation is easing. Last week, the government reported that the Fed's preferred price index, a so-called ``core'' measure that excludes food and energy costs, had risen 2.1 percent in the 12 months through April. That exceeds the zone of 1 percent to 2 percent, desired by Bernanke and several other Fed members. Chicago Fed President Michael Moskow said yesterday that he'd like to see that number be closer to the midpoint of that range. ``Core inflation recently had been a bit higher than had been expected,'' the minutes said. ``Recent developments suggested that upside risks to inflation had risen somewhat since the time of the March meeting,'' the minutes said. ``However, participants also cited some factors that could be expected to restrain inflation,'' including ``moderate'' growth in compensation, ``relatively wide profit margins'' and additional productivity gains. ``They're putting a fair amount of emphasis on inflationary expectations and are elevating the role'' of watching securities tied to inflation, said Paul McCulley, managing director at Pacific Investment Management Co. in Newport Beach, California, who also found the minutes ``hawkish.'' Dollar Drop In addition, the dollar's recent drop ``was another factor that could add to inflation pressures, although the effect of prior changes in the foreign exchange value of the dollar on core consumer prices had apparently been limited,'' the minutes said. Moskow, who isn't a voting FOMC member this year, said in the interview on CNBC yesterday that ``it's a situation that we have to monitor very carefully.'' Richmond Fed President Jeffrey Lacker, a voting FOMC member, told reporters May 18 that rising inflation makes a pause in the series of interest-rate increases ``less likely.'' ``The inflation outlook is at the borderline of acceptable and perhaps moving beyond,'' Lacker said. ``In circumstances like that, containing inflation has to be the primary focus.'' Other officials have said they will wait for more economic data before reaching a conclusion on what the Fed should do at the next meeting. ``I don't think it makes any sense for me to think real hard right now about what my policy position is going to be,'' Poole said May 18. ``I will reach that conclusion when I have all the data in hand.'' Kohn Committee In a separate move between the March and May meetings, Bernanke appointed a subcommittee to study communications issues, led by Governor Donald Kohn, with Minneapolis Fed President Gary Stern and San Francisco Fed President Janet Yellen. Kohn said at the May 10 meeting that the subcommittee's objective was to help the FOMC ``frame and organize discussion of a broad range of such issues over coming meetings,'' according to the minutes' summary. Earlier today, New York Fed President Timothy Geithner said a central bank ``cannot provide more assurance about the likely future course of policy than it actually has.'' Still, Fed policy makers, facing an ``uncertain world,'' must still be clear in their message to retain their inflation-fighting credibility and flexibility to make decisions. To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net
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