FOMC Members Utter More Warnings on Several Issues

Thursday, June 09, 2005

Although Fed chairman Alan Greenspan's testimonial to Congress about the economic outlook will most likely overshadow all other events of the day, here a compilation of the most recent economic warning of FOMC members over the last 24 hours. Fed governor Ed Gramlich said on Wednesday that the US cannot grow its way out of its budget deficit problem despite recent improvement in budget and trade numbers, Reuters reported.
Fed Kansas City president Thomas Hoenig, a non-voting FOMC member was interviewed by the Wall Street Journal, saying he remains more focused on the risk of inflation than of weaker growth.
"Fortunately, the budget numbers and the trade numbers have gotten a bit better recently but that doesn't solve the long-term problem," Gramlich said in response to audience questions after a speech to Milwaukee-area business leaders.
Gramlich voiced concerns about the White House's plans on Social Security reform.
"Individual accounts may or may not be a good idea, but they won't solve the basic actuarial problem," he said, adding, "the stock market can be an uncertain mistress," pointing out that stock returns are far from guaranteed. Gramlich said he was "worried on the fiscal side" and said the country should work to balance the federal budget outside of Social Security.
Gramlich said Medicare was a bigger problem and should actually be dealt with before Social Security. He also said Americans needed to save more, "in a macroeconomic sense, I would argue that we are not saving. But we ought to."
Gramlich wil retire after the coming FOMC meeting on June 29/30.
Kansas City Fed president Hoenig warned of inflationary pressures.
"Data, while up and down, has been generally good, we're still talking growth of better than 3 percnt," Federal Reserve Bank of Kansas City President Thomas Hoenig said in an interview with The Wall Street Journal Wednesday. "Then you look at these inflation numbers and, while I'm not alarmed by them, I still see them also rising. So you have pretty solid growth and you have this inflationary pressure."
He noted that first-quarter growth had been revised up to a 3.5% percent annual rate. He expects growth to remain "in that neighborhood of 3 to 3.5 percent...through the course of the remainder of the year. While investment has backed off a little bit because of the elimination of accelerated [tax] write offs, there's still fairly good investment growth. Personal income levels are good and therefore consumers should remain" a contributor to growth. He added, "I'm not oblivious to the fact that we could have a shock," noting Europe is not growing as fast as generally expected.
The US government yesterday revised its growth expectation a notch down to 3.4 percent for the running year.
On interest rates Hoenig concluded that the Fed still has some way to go before the "neutral zone", where inflation will be contained and growth not hampered, will be reached.
Hoenig declined to say whether he thought the Fed would continue with "measured" rate increases: "We have to wait and see...how the data continues to evolve." Still, his remarks on inflation risks and still-accommodative monetary policy suggest he is inclined to continue tightening policy.
Hoenig said the unusually low level of long-term interest rates, whose causes have puzzled Fed officials including Chairman Alan Greenspan, will not have a direct bearing on what the Fed does with short-term interest rates. The Fed, he said, in deciding if monetary policy is too loose or too tight, does not look at the yield curve but rather the behavior of economic growth and inflation. "Our mission is to monitor the real economy and the inflation numbers. That is what should be influencing our policy, not just finding ourselves looking at the yield curve and saying, `What am I going to do next?"

Already on Tuesday Fed Atlanta president Guynn had said inflation risks all seemed to be pointing in one direction - up - and hinted that more rate increases were coming.
SPOTTED IN BLOGOSPHERE: James D. Hamilton, who is professor of Economics at the University of California, San Diego, has an interesting post on Fed rate predictions at his young blog Econbrowser. He argues that one should not look at the forecast, but where investors are actually putting their money and directs to a respective contract traded at the CBOT.

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