Sherry Cooper
Sherry Cooper
Sherry S. Cooperis a Canadian-American economist. Cooper is currently Chief Economist for Dominion Lending Centres. She was Executive Vice-President and Chief Economist of BMO Financial Group, with responsibilities for economic forecasting and risk assessment. She comments regularly in the press on financial issues...
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I'm not worried about inflation per se ; I'm worried about inflation in asset prices. When the Fed has been aggressively easy in the past, it's ended up having to come in and aggressively raise interest rates and cause a lot of unnecessary dislocation.
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High energy prices keep on working their way through the system. The risks remain skewed to a mild up-creep in core inflation during the months ahead, which will keep the Fed on track for another rate hike in March and likely in May.
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Financial markets want the Fed to signal possible easing ahead due to the growth slowdown and stock market declines, ... However, the Fed will be reluctant to do that while CPI core is still accelerating.
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This all but seals the deal on a coming cessation in Fed tightening,
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The Fed might have been in a dilemma if signs of slower growth were coupled with signs of a wage/price spiral. However, that is emphatically not the case. The underlying inflation outlook is not a problem for the Fed or the financial markets.
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I do believe there is still evidence that the economy is red hot, and I think the Federal Reserve will be monitoring the income numbers closely to decide whether to go 25 basis points or 50 at their upcoming policy meeting.
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Bearing in mind that the Fed wants higher inflation, the news is not unwelcome. And the market will remain firmly in the camp that the Fed will not tighten soon, ... Nevertheless, the risks from the PPI are easy to see and look real in light of the big decline of the dollar and rise in import costs that preceded them.
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Despite slowing job growth momentum, the Fed is going to pay attention to the diminishing slack (the 5 per cent unemployment rate could be as low as 4.8 per cent if not for the hurricanes) and the pickup in wage pressures,
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The shift in the Fed chair will be seamless,
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The markets are assuming that the Fed are finished tightening for the year, ... That presumption might prove to be premature. We, and the Fed, will wait and see.
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My take is that the Fed will continue to raise overnight rates until it feels it has moved from a stimulative to a neutral policy stance. That will likely take the funds rate to 4 per cent-to-4.25 per cent by yearend.
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The inflation data does not take the Fed out of the picture. It does, however, remove the risk of the Fed having to tighten 50 basis points on June 30.
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If the incoming data remain relatively soft, including the inflation data, the Fed will take a pass in August, ... Even if they do raise rates, it may well be the end of the tightening cycle, which is very good news for the stock and bond markets.
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The Fed and the markets will see few signs of slowing in these figures, but little reason to fear an impending inflation acceleration either ,