July 12, 2005
Signs that the Fed Believes Interest Rates Still Need to Rise
More signs that the Federal Reserve thinks that we are now quite close to full employment. Mark Thoma watches Bloomberg:>Fed's Lacker Says Rate Increases Likely to Continue: Fed Speak signals more rate increases ahead:
Fed's Lacker Says It's 'Early' to Stop Raising Rates (Update1), Bloomberg: It's too early to expect a pause in Federal Reserve interest rate increases, Fed Bank of Richmond President Jeffrey Lacker said today.... “I think it's still too early to be foreseeing a pause” in Fed rate increases... “I'm comfortable with the measured pace characterization right now.” While “inflation expectations seem well contained,” economic growth appears “fairly solid.”... He said he is watching inflation data to see whether rising oil prices spur price increases for other goods and services.... “Oil prices always pose a bit of a concern to the extent that sharp increases pass through to core inflation,” he said. The inflationary effect of higher oil prices in recent years has been “fairly limited,” he said. “The more likely risk, although it is a small one at this point, is an acceleration of unit labor costs.”... “In recent months, we've had some core PCE numbers that have been higher than I would like to see sustained, but I like where we are on a year-over-year basis,” Lacker said. “The general anticipation is for the monthly numbers to settle back down in the second half of the year.” With the economy continuing to expand at a “fairly solid pace,” the Fed can keep up its campaign to prevent inflation from rising, he said. “In that kind of situation, following through is probably the order of the day,” he said. “It's going to be data driven. It's going to depend on how things unfold.”
David Altig reports probabilities that agree with this assessment. However, the qualification at the end is worth noting. Full steam ahead until the data say otherwise.
The fall in the employment-to-population ratio, the stagnant pace of real wage growth, and the remarkably high relative level of long-term unemployment all say that there is still considerable slack in the labor market. Only the unemployment rate--now hovering near five percent--says that we are near full employment.
Posted by DeLong at July 12, 2005 03:58 PM