The Fed Army Rings The Alarm Bells

Wednesday, October 05, 2005

A phalanx of Fed presidents has rung in the month with their alarm bells and sent markets nosediving. After Fed chairman Alan Greenspan who last week showed discomfort about the budget deficit, the housing bubble and raised the possibility that only a painful "creative destruction" will pave the road to renewed employment growth here and here, Fed Dallas president Richard Fisher and Fed St. Louis president William Poole both expressed their will that the Fed won't take a pause in rate hikes. Philly Fed president Anthony Santomero delivered the third hit after Tuesday's markets close, saying the Fed cannot eliminate business cycles.
While Fisher in his speech considered current prices hovering near the upper end of the Fed's comfort zone, Poole hinted clearly in his speech that the Fed will raise the Fed Funds rate another 50 basis points by year-end and viewed these moves as reasonable in the face of inflation seeping through into core prices because of high energy prices.
My two cents are as follows: It seems the Federal Reserve System wants to prime investors for a higher level of the "neutral zone" for interest rates as the 4-5% range that has been assumed as appropriate until now. And watch employment numbers. The hurricane desasters will most certainly reverse the downward trend of the unemployment rate for at least until the end of the year. Remembering last week's data, especially wage figures indicate that the most solid pillar of the US economic expansion, the consumer, is already losing the fight against inflation.
For more fine Fed commentary visit the blogs of William J. Polley and Mark Thoma.
Polley also picked up George W. Bush's comments about the succession of Greenspan. I got some Dubya-speak ringing in my ears that goes like that: The next Fed chairman first has to get the job done and secondly be independent, the war-president said. Bush is confirming my worst fears.


Wikinvest Wire