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Fed Credibility Is Called Into Question, May 15, 2006
Summary: Rising gold prices, rising commodities prices, a weaker dollar, faster wage inflation, a cyclical low unemployment rate, a cyclical high capacity utilization rate, and rising TIPs spreads suggest that inflation risks are increasing and that the market may be losing confidence in the Fed's willingness to act decisively to contain inflation. That's a very long list, with something to appeal to disparate analysts, so it's not surprising that Fed credibility is being called into question. We do not doubt the Fed's commitment to containing inflation, at least not yet. But we do think the risks are highly one-sided and that more rate hikes will be necessary.
Rising gold prices, rising commodities prices, a weaker dollar, faster wage inflation, a cyclical low unemployment rate, a cyclical high capacity utilization rate, and rising TIPs spreads suggest that inflation risks are increasing and that the market may be losing confidence in the Fed's willingness to act decisively to contain inflation. That's a very long list, with something to appeal to disparate analysts, so it's not surprising that Fed credibility is being called into question. We do not doubt the Fed's commitment to containing inflation, at least not yet. But we do think the risks are highly one-sided and that more rate hikes will be necessary.
The Fed has been its own worst enemy is maintaining its credibility with the market. Its strategy to signal its intentions systematically to the market over the course of a 400 basis point rate hike reduced uncertainty, but also softened the blow to...
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This section contains 432 words (approx. 2 pages at 300 words per page) |
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