Wednesday January 4, 2006 - 17:07:58 GMT
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FOMC Minutes Signal End To Rate Hikes...Wait A Minute
It is difficult to argue that the Fed wants us to think the rate tighteninghcycle is nearing a pause at least and perhaps an end at most. But this seems to be challenging intellectual honesty. I think there needs to be context before one can write off rate hikes in a Bernanke-Chaired Fed.
Least we forget, this FOMC is Greenspan's. He makes the decisions, he writes the statement and he normally gets full cooperation from FOMC members - the kind reminiscent of the old Soviet Kremlin, or democratic centralism. Moreover, Greenspan wants to depart from the Fed with the current job of normalizing rates complete...not leaving much if anything further to do in the hands of his successor. It is neater this way.
One thing the FOMC is not known for is dissent. Bernanke could change this but let's assume he stays true to his word in moving slowly from the Greenspan model to his own model. In other words why would he wish to surrender some if not most of the control Greenspan has over the FOMC come February and more notably the March28 FOMC meeting. In as much as Greenspan does not see a need to do more on rates, Bernanke may determine that capacity constraints and lagged effects from rising energy prices warrant erring on the side of restraint even from the lower end of a neutral Fed funds rate. While Bernanke was at the White House he sounded quite dovish on inflation, but this was his political self speaking. Granted not enough is known about "Gentle Ben" to suggest he sees data more threatening on price stability and a need to establish his own inflation credentials without much downside risk. What is another 25bps in the larger scheme of things when the US economy is growing in the 3-4% range when Ben has a reputation to establish?
I am not denying that core inflation remains well behaved and there is little evidence of a pass through from the rise in energy prices (also little evidence of first round effects on consumption). But there is enough uncertainty out there to keep the Fed on a tightening path for a handful of FOMC meetings this year. What we can be sure about is that the current Fed think believes that the forced march to normalize rates (reach neutral Fed funds rate) is nigh. However, it is naive at this stage of the business cycle to assume that the FOMC will not have to move from neutral to restrictive if the US economy continues too grow at an unsustainably fast pace. It is equally naive to think that Bernanke is less inclined to tighten than Greenspan all else being equal. And again I think Bernanke will adopt the democratic centralism of Greenspan at first before significantly moving to a more democratic model. He knows the Greenspan model as well as anyone...by all accounts rubbed up against it more than once, sometimes even irritating the Chairman.
It may turn out that Jan31 is the last in the cycle. But I think this is really more about what Greenspan would like than what is probable. Too much can happen on the data front and too little is known about Bernanke's character and wishes to believe in a literal translation of the Dec13 FOMC minutes. And for the few old timers around - we are still in a period of asymmetric risks - more upside risks to price stability than downside risks to growth.
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