Gary Thayer
Gary Thayer
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The Fed will overlook the strength in the economy before Katrina and focus more on getting the economy back on its feet and probably will hold policy steady until we see how the economy is actually dealing with the shock of lost jobs and high gasoline prices resulting from Katrina.
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The Fed will probably hold rates steady at a low level as long as they can. And I think as long as the unemployment rate is rising, they'll maintain a policy bias toward weakness.
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The Fed may be looking at oil prices as a reason for the economy to falter and not a reason for it to overheat, so they won't want to raise rates yet,
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If we hadn't heard from Greenspan last week that the Fed is still worried about an uneven recovery, we might be more upset about these numbers. But Greenspan is concerned that these retail sales numbers could falter later on so these numbers probably won't have that great an impact.
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It speeds up the time that the Fed will probably think about raising rates and that's negative for fixed-income.
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The bond market liked the inflation data. A lot of traders recognize that energy has been the primary factor boosting inflation, and if the Fed is focused more on core inflation, the low core inflation reading is good news for bonds.
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The bond market had been thinking that the weak economic numbers that we've seen would cause the Fed to think twice about raising rates,
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Inflation is creeping up, but it's not out of hand. I think that's pretty important. The bond market may have discounted a worst-case scenario over the last couple of months on inflation, and now maybe traders won't have to worry about the Fed moving too fast.
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But it looks like Mr. Greenspan is saying the slowdown in the economy will be short-lived and that suggests that the Fed will probably continue to raise rates.
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So core inflation is still rising slightly but doesn't appear to be a problem, and I think this is good news for the Federal Reserve . With energy prices declining it reduces the risk that fuel costs will be passed on to consumers.
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It suggests the Fed is going to be watching closely to see if it is time to start taking back rate cuts. I don't think he is saying that is imminent, but his tone is that it might be sooner rather than later.
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The Fed will probably not put a lot of emphasis on this data and instead will be looking more at the economy after the hurricane.
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This is probably going to keep the Fed concerned about inflation.
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This is probably going to keep the Fed concerned about inflation. If the housing market is still healthy, policy-makers will probably continue to raise interest rates.