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October 10, 2005

Economist's View: Fed Watch: Clearly Hawkish Signals

Tim Duy watches the Federal Reserve grow increasingly hawkish:

href="http://economistsview.typepad.com/economistsview/2005/10/fedwatch_clearl.html"> Economist's View: Fed Watch: Clearly Hawkish Signals : Fed policy makers are taking some of the fun out of the game at this point with their clear warnings on inflation. Indeed, even “Mr. Eighth Inning,” Dallas Fed President Richard Fisher, who I had previously dubbed a dove, has delivered a series of market rattling comments. David Altig’s compilation... provides a great overview of this increasingly hawkish language that appears to point to only one thing – more rate hikes in the coming months. Indeed, this is the theme picked up in this morning’s Wall Street Journal. And incoming data and anecdotal evidence remain supportive of that path.

Probably the most important piece of data to arrive last week was the September labor report, which came in well above expectations with a 35,000 dip in payroll.... [T]he labor report will only be supportive of the Fed’s contention that the impact of Katrina and Rita on the demand side of the economy is minimal and locally contained....

What about the continuing troubles in the automotive and airline industries?... Will this rattle Fed officials? Doubtful. As I have argued before, this is part and parcel of the ongoing saga of the US auto industry – an industry whose profits depend upon a vehicle type fewer people want to purchase.... [A]irlines are also caught in a structural straightjacket. High labor costs, high fuel costs, and relentless competition all conspire to force an ongoing shakeout....

Greenspan can’t be happy with... FedEx announcing a 5.5% increase in shipping rates.... FedEx is clearly confident enough about the outlook to pass on rising fuel costs to consumers. And it’s not just FedEx that’s raising prices – the Wall Street Journal reported that railroad customers are expecting a 5.6% rate hike in the next six months. It is also widely expected that UPS will join the party as well. These are the kinds of price increases that feed their way into virtually every business in the country....

In short, worries about demand will not resonate with Fed officials who see enough goods being shipped around the country that freight companies can push through higher prices. In fact, these are the kinds of stories that leave a central banker sleepless at night, because, as Fisher so clearly stated, “any central banker worth his or her salt is genetically unable to tolerate inflation.” The Fedspeak suggests that other officials agree, loudly and clearly, on this point.

Posted by DeLong at October 10, 2005 07:18 PM