June 22, 2005
Where Is the Federal Reserve Heading?
Via Mark Thoma
Mark Thoma: John M. Berry reports that two Fed presidents, Gary Stern of Minneapolis and Jeffrey Lacker of Richmond, expect continued tightening in the face of robust growth:
The Fed Will Make Several More Rate Increases: John M. Berry, Bloomberg: Federal Reserve officials see U.S. economic growth continuing at around a 3.5 percent pace into 2006 with inflation pressures strong enough to merit several more increases in the Fed's target for the overnight lending rate. Gary Stern, president of the Minneapolis Federal Reserve Bank, summed up the thinking of many of his Fed colleagues when he said in a June 20 interview with a Japanese newspaper (Nihon Keizai), "Right now there's no reason to stop tightening credit"... inflation pressures -- while still "contained," in the view of Fed Chairman Alan Greenspan and other officials -- are still strong enough to be worrisome. Companies appear to have regained some of their power to pass cost increases on to their customers... And oil prices have kept rising.... "I have been happy that the pass-through to core has been less than we feared, and that the expectations embedded in the yield curve have subsided noticeably," Jeffrey Lacker, president of the Richmond Federal Reserve Bank, told reporters on June 20 after a speech to a bankers group in Hot Springs. Virginia. Nevertheless, like Stern, Lacker said, "I think a moderate pace of continued tightening is a sensible outlook at this point and that it is too soon to say when we are going to stop."...
At least one knowledgeable observer, James Hamilton, says of the [possibility of a] 4% [medium-run] target "I hope that the market guess of a 4% fed funds rate is wrong, and think it probably will be. The Fed couldn't be that stupid, could it?" We shall see.
Posted by DeLong at June 22, 2005 04:06 PM