Stephen Stanley
Stephen Stanley
Stephen Stanley is a Canadian singer-songwriter associated with the band The Lowest of the Low. Stanley also performs as a solo artist, sometimes in collaboration with violinist Carla MacNeil...
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It is never a happy day for the Fed when GDP is revised down and inflation is revised up.
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In terms of monetary policy right now, most people expect the Fed to tighten during the next two or three meetings, but it's foggy beyond that. Greenspan didn't really say much to clarify, either in his comments or in the question period. He was appropriately non-committal, and so there's been little reaction from stocks.
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The idea that the Federal Reserve is close to being done with interest rate hikes has certainly benefited the bond market, and stocks have benefited as well.
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Fed officials will remain watchful for a reacceleration in unit labor costs, especially with anecdotal evidence and an upturn in average hourly earnings growth suggesting that wage pressures may be picking up.
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The stock market has been pretty stubbornly hewing to the idea that the economy is slowing down and the Fed may stop soon. So to the extent that people perceive the statement as a little more hawkish, it's maybe upsetting.
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But certainly the market should be focused on the core number, since that's what the Fed looks at. We're looking for an 0.2 percent increase, which wouldn't cause a big reaction in the market.
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Productivity rises could be more modest going forward, since hours worked should grow faster as job losses caused by the hurricanes are reversed. Fed officials will remain watchful of a reacceleration in unit labor costs.
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Clearly, Fed officials are more worried about the threatening things that they see (energy spike, eroding slack, etc.) than the benign core consumer price index readings.
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I do not expect to see the Fed let its guard down on inflation any time soon even though the worst fears of energy pass-through have not come to pass.
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The minutes kind of fed into the sentiment in the market right now that the Fed is closer to done. The minutes threw lighter fuel on that one.
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The Fed is, if anything, more concerned about inflation than they are about a growth slowdown.
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If inflation doesn't accelerate much from here, and the Fed just raises rates a little more, we might see something like the end of the 1990s again. But if the Fed has to really ramp up to fight inflation, it's going to be a much worse environment than investors realize.
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There is sufficient upbeat news on the economy to convince the FOMC to tighten. If the economy warrants a rate hike, the Fed would be doing a great service by delivering.
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If the economy keeps growing at a faster pace, the Fed may need to boost rates for longer than what markets are currently expecting. I think that's what the stock and bond markets are reacting to right now.