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FOMC
WORRIES MAINLY ABOUT RISING FEDERAL DEFICITS & HIGHER INFLATION
by Toni
Straka
October 12, 2005
Ongoing
lax fiscal policy and growing inflationary pressures seem to be the two
main worries in the economic outlook of the Federal Open Market
Committee (FOMC), the latest
FOMC minutes
show. While hurricanes Katrina and Rita had added to to the uncertainty
about the course of the economy over the coming months - but were seen
to have a temporary negative effect only - the committee decided to stay
on its path of 25 basis point Fed Funds rate hikes in order to quell any
misled expectations about "its perceptions of the fundamental
strength and resilience of the economy and about its commitment to
fostering price stability."
Expect
further rate hikes and do not assume that the Fed will stop at 4.50 %.
The FOMC acknowledged that even after the latest rate hike,
"the
federal funds rate would likely be below the level that would be
necessary to contain inflationary pressures, and further rate
increases probably would be required."
A
bit further down the statement had some milder words.
"Although
energy prices had the potential to add to inflation pressures, and
inflation expectations had recently exhibited some signs of
increasing, members agreed that the risks to inflation, as well as
those to growth, remained essentially balanced under an assumption of
appropriate policy action."
The
not-so-bad-news went only that far as
"...meeting
participants were concerned that price pressures, which had been
elevated before the storm, could climb further, primarily as a result
of additional increases in energy prices."
And
there are massively growing worries about the public
debt which stood at $7.99 trillion as of October 10.
"With
regard to fiscal policy, meeting participants noted that federal
outlays would increase sharply in order to assist with recovery and
reconstruction efforts in the aftermath of the hurricane. The eventual
size of the increment to federal outlays was unclear, but it was
likely to be quite large. The substantial step-up in government
spending would add to federal deficits that were already large and
underscored the worrisome loss of fiscal discipline evident in recent
years."
This
news comes on a day when Bloomberg TV elevated Treasury Secretary John
Snow into the ranks of those that might succeed Greenspan as Fed
chairman. Not exactly a reassurance that the administration will step up
its efforts to rein limitless spending to a point where the public debt
appears to become unsustainable.
The
economy won't be of much help in rebalancing the US, the forecast
expects.
"...the
staff lowered its projection for economic growth over the remainder of
2005 in light of the economic dislocation associated with Hurricane
Katrina. At the same time, however, the staff increased the growth
rate forecast for 2006 to reflect the boost to economic activity from
the rebuilding effort. By 2007, the level of output was expected to
move back to the path it would have followed in the absence of the
storm. The staff revised upward its forecast of overall inflation for
2005 and of core inflation for 2006, reflecting the effects of higher
energy prices, but lowered its projection for overall inflation
slightly for 2006. It was recognized that there were considerable
near-term uncertainties and that many data series in coming months
would be influenced by the effects of the storm."
There
were no specific figures given, adding to the impression that the Fed is
as clueless about the future development as all other mortals who see
relatively robust earnings numbers in the corporate sector but share the
macroeconomic sorrows of the the Federal Reserve System.
It
has to be noted in this context that the FOMC took note of anecdotal
evidence that lower-income households consumption may get further
restrained by high energy prices. This could bring company earnings
under renewed pressure from two sides: less spending and higher prices
in a time when consumers have already been spending more than they earn.
A
first conclusion of the meaning of the latest Fedspeak confirms the
impression that growing inflation fears are taking hold with most Fed
representatives as they have repeatedly voiced such concerns in the last
weeks. [See
the posts further down in this blog.]
The
dreadful picture has not changed for better and today's upward price
action in energy markets combined with bond and equity markets heading
south only reinforces my negative expectations for the US economy which
will be the inflection point for a global downturn.
In
case you are not convinced, check precious metals prices. Gold trades at
an 18-year high, silver at this year's high, and platinum is at a
25-year high.
© 2005 Toni Straka
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