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Wishful Thinking, March 20, 2006
Summary: Markets rallied last week in response to a slightly lower-than-expected consumer price index, which reinvigorated hopes that the Fed might almost be done raising interest rates. The flaw in this thesis is that low inflation implies that meager increases in nominal income translate into sizeable gains in real income, which keeps household spending strong. In fact, income growth is solid. And strong gains in consumer spending are no longer desirable, given that the labor market is already fairly tight and starting to push up wage rates. The Fed may be willing or able to forgo a rate increase if inflation remains low. But that should prove to be a temporary event. Bernanke's speech will likely be (mis)interpreted as suggesting the Fed will pause soon, but I doubt that is his intention.
Markets rallied last week in response to a slightly lower-than-expected consumer price index, which reinvigorated hopes that the Fed might almost be done raising interest rates. The flaw in this thesis is that low inflation implies that meager increases in nominal income translate into sizeable gains in real income, which keeps household spending strong. In fact, income growth is solid. And strong gains in consumer spending are no longer desirable, given that the labor market is already fairly tight and starting to push up wage rates. The Fed may be willing or able to forgo a rate increase if inflation remains low. But that should prove to be a temporary event. Bernanke's speech will likely be (mis)interpreted as suggesting the Fed will pause soon, but I doubt that is his intention.
Evidence that inflation remains well contained does not provide a basis for the Fed to refrain...
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This section contains 445 words (approx. 2 pages at 300 words per page) |
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