At this point I think their only path is to cut rates vigorously and try to stimulate (read inflate) a rapidly weakening economy, since they are (in my opinion) powerless to fight this form of inflation which is based on world emerging middle class demand on all resources (vs finite supplies). So if you can't fight inflation effectively you might as well tackle the absolute lack of growth that is 'coming around the mountain as she comes'....
If this were just a plain old recession that's 1 thing, but with housing bubble, and credit bust we have a lot of ills hitting at once... still looking for 3% or lower Fed funds rate by end of year. And look for all that fiat money to inflate assets (even eventually the stock market), but first commodities appear to the next big bubble. Gold to $1K in '08 looks less and less like an Outlier Prediction by the day.
Lockhart Says 'Negative' Signals on the Economy
- Federal Reserve Bank of Atlanta President Dennis Lockhart said that ``negative'' signals on the economy are increasing and that he expects ``weak'' growth in the first half of the year.
- ``The pivotal question'' for this year ``is the extent of current and future spillover from housing and financial markets to the general economy,'' Lockhart said in a speech to the Rotary Club of Atlanta. ``The negatives in our economy may be gaining momentum,'' he added, requiring policy makers to ``respond pragmatically to whatever developments arise.''
- Lockhart's comments may reaffirm traders' convictions that Fed officials will cut interest rates at least a quarter-point when they meet this month. Anticipation of a bigger, half-point move rose last week after reports showing unemployment rose to a two-year high and a contraction in manufacturing in December.
- ``Lockhart's remarks do nothing to upset the view that the Fed will provide further policy accommodation,'' said Michael Feroli, economist at JPMorgan Chase & Co. in New York.
- Federal funds futures show a 62 percent probability of a half-point reduction in the federal funds rate to 3.75 percent at the Jan. 30 meeting, up from a 4 percent probability a month ago.
- Lockhart told reporters after his speech that ``he wouldn't foreclose'' the possibility of another rate cut because he is ``equally or more concerned'' about risks to growth than inflation.
- ``There may have been in some respects some slowness to recognize all the signs'' of a slowing economy, Lockhart said. ``But starting in August, I feel strongly that the Fed has been attentive and been making appropriate policy actions.''
- ``I think we are at a time of heightened uncertainty,'' Lockhart said. He said his baseline forecast anticipates ``a weak first half of 2008 -- but one of modest growth -- with gradual improvement'' starting in the second half and into 2009. ``This outcome assumes the housing situation doesn't' deteriorate more than expected and financial markets stabilize,'' he said. (oh boy, those are some seriously bad assumptions)
- Federal Reserve Bank of Philadelphia President Charles Plosser said further interest-rate cuts may be needed should the outlook for U.S. economic growth become ``substantially weaker'' than already projected.
- ``A substantially weaker outlook than expected, particularly if that weakness is projected to be more prolonged than anticipated, may require further adjustments to policy,'' Plosser said in a speech in Gladwyne, Pennsylvania. He said he already expects several ``sluggish'' quarters of growth.
- ``I see more worrisome signs of underlying price pressures,'' Plosser said in prepared remarks to the Main Line Chamber of Commerce. He said he also senses that ``inflation expectations are more fragile now than they were six months ago.''
- ``If inflation expectations continue to rise, it will be difficult and costly to the economy to deliver on our goal of price stability and puts at risk the Fed's credibility for maintaining low and stable inflation,'' Plosser said today. (Bingo!)
- Plosser said the Fed, in lowering its benchmark interest rate 1 percentage point last year, was responding to changes in its economic outlook, yet there's ``limited'' evidence backing concern that the ``strains in financial markets might have ramifications for the broader economy.'' (Not Bingo!)
- The increase in the unemployment rate to 5 percent in December marked a ``somewhat sour note,'' Plosser said. The rate ``may rise somewhat above 5 percent'' this year, he said, with slower job growth for two to three quarters. (again, this insistence that it's only a 2-3 quarters issue is astounding to me - I guess by Halloween 2008 this will all be a bad dream?)
- Plosser said he expects the housing recession to ``bottom out near the middle of the year,'' then the industry should ``turn slightly positive in the latter part of 2008.'' He didn't anticipate ``significant improvement'' until 2009. (It appears Plosser is aiming for work as an economist with the National Association of Realtors)
- ``Recent data suggest that inflation is becoming more broad-based,'' he said. ``Recent increases do not appear to be solely related to the rise in energy prices.''
