Bill Cheney
Bill Cheney
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I think we're toward the end of a period of real weakness and, by the third quarter, all the money (Fed Chairman Alan) Greenspan and the Fed have been pumping out will start to be spent.
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Looking ahead beyond the current gloom, there is a serious risk that we already have inflationary forces baked into the system. By late spring, the Fed could be cranking up interest rates even faster than they cut them.
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Today's rate cut was no surprise. Even the half-point cut was more or less expected. In fact, the economy is still weak enough for the Fed to feel free to keep easing.
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What worries me the most is a slip backward becoming a spiral downward. Jobs are the linchpin of both consumer confidence and consumer spending. We can't sustain many more losses like this without that downward spiral getting started. This is the kind of data that could make the Fed think about easing again.
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At this point I am guessing that the Fed is pretty committed to raising rates in January but after that all bets are off.
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Monetary policy is the perfect instrument for these circumstances. The Fed can keep pushing as needed, but still can turn on a dime and pull back as soon as spending starts to rebound.
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Weak employment growth but higher hourly earnings point Greenspan and the Fed in two different directions. Either the economy is slowing down and the Fed needs to sit tight, or inflation is starting to take off and another tap on the brakes may be necessary.
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I don't think we can discount the legitimate concern that the Fed has been pumping too much liquidity into the economy. It may be that they have to backpedal furiously as the economy starts to recover. Inflation has been down for so long, it may be hard to imagine it ever getting back up -- but you better believe it still can.
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It's clearly good news. Clearly it means that the Fed is still free to ease as much as they are inclined to.
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This is kind of number that will let the Fed relax and keep cutting rates as long as they see a need.
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The Greenspan Fed has inaction down to a fine art. They stood by through much of the late 1990s, allowing a very beneficial reduction in unemployment without suffering any inflationary consequences. When they do have to move, they do so quickly and surgically.
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The inflation threat has receded yet again. I can't see the Fed moving now at least until early next year. They have almost no evidence of inflationary pressures and there are hints that the economy finally is slowing.
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The economy is neither roaring nor stalling; it's clearly out of the soft patch and moving along at a decent pace, and that's all the Fed needs right now.
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If unemployment sticks at about 6.0 percent and starts coming down, the Fed will probably feel it has to start tightening fairly soon.