Fed wants to raise rates?

Discussion in 'Economics' started by The Kin, May 8, 2008.

  1. I'm short the dollar dammit. Looks like it's time to close my position and go long.


    Fed's Hoenig Says 'Serious' Inflation Risk May Prompt Rate Hike

    By Steve Matthews
    Enlarge Image/Details

    May 6 (Bloomberg) -- Federal Reserve Bank of Kansas City President Thomas Hoenig said today ``serious'' inflation pressures may compel the central bank to raise interest rates.

    ``There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it,'' Hoenig said in the prepared text of a speech in Denver. Consumers are gaining an ``inflation psychology to an extent that I have not seen since the 1970s and early 1980s.''

    The Federal Reserve must be prepared to quickly raise rates as the economy, now nearing a recession, recovers later this year, Hoenig said. Fed policy makers signaled April 30 they're ready to hold off on further rate cuts as they assess the impact of the 3.25 percentage points of reductions since September. They dropped a reference to ``downside'' risks to growth from the statement that followed their previous meeting.

    ``A sharp slowdown in growth has put the economy at the brink of a recession while, at the same time, rising commodity prices have caused inflation pressures to rise considerably,'' Hoenig said to the Economic Club of Colorado. He isn't a voting member of the Federal Open Market Committee this year.

    Interest rates are low enough that, when combined with tax rebates passed by Congress, the economy should begin to pick up in the second half, Hoenig said.

    ``The current accommodative stance should be sufficient to cushion the economy from a deeper slowdown,'' he said. ``As the economy recovers and credit conditions improve, however, it will be necessary for the Federal Reserve to remove the policy accommodation in a timely manner.''

    Inflation Concern

    Hoenig, 61, dissented from a rate cut on Oct. 31 because of his concern about inflation. Dallas Fed President Richard Fisher and Philadelphia's Charles Plosser voted against the past two rate cuts.

    Traders anticipate the Fed will leave its main interest rate unchanged at 2 percent through October, based on futures prices on the Chicago Board of Trade.

    The current economic weakness can be largely attributed to slumping housing construction and higher energy prices, which have reduced consumer and business spending, Hoenig said.

    ``Financial market disruptions, while noteworthy, are not the major story behind the recent weakness,'' he said. ``Energy price increases and housing dominate this slowdown.''

    The U.S. economy lost 20,000 jobs in April, the government said last week. Gross domestic product expanded at a 0.6 percent annual pace in the first quarter, the same as in the previous three months, for the slowest six months of growth in seven years.

    The economy is ``sliding into a recession,'' Martin Feldstein, a member of the committee that charts the American business cycle, said today.

    `Weakening Economy'

    ``This is a weakening economy,'' Feldstein, president of the National Bureau of Economic Research, said in a Bloomberg Television interview in New York. ``If you compare where the economy is now, with where it began at the beginning of the year, just about every indicator is down.''

    Federal Reserve Chairman Ben S. Bernanke, seeking to end the worst housing slump in a quarter century, urged the government and mortgage lenders in a speech yesterday to intensify efforts to avoid defaults. Foreclosure filings rose 57 percent in March from a year earlier, according to Irvine, California-based RealtyTrac Inc.

    Still, ``there are reasons that suggest the economic slowdown will be short-lived,'' citing low interest rates, tax cuts and rising exports, Hoenig said.

    `Troublesome' Inflation

    The combination of slowing growth and inflation is ``troublesome,'' Hoenig said. Rising global commodity prices and higher prices of imported goods from China and other markets are pushing up prices.

    ``Some would dismiss these rising inflationary pressures as temporary,'' he said. ``I believe they are more serious.''

    The Federal Reserve's preferred measure of inflation, which strips out food and fuel prices, increased 2.1 percent in March from 12 months earlier. Including the two items, prices climbed 3.2 percent, the fifth straight month in excess of 3 percent.

    Public expectations of inflation five years in the future rose to 3.2 percent in April, the fastest since October 2005, as measured by a Reuters/University of Michigan survey.

    Financial markets are showing signs of stabilizing, though a full recovery will take time, Hoenig said.

    The Federal Reserve's rescue of Bear Stearns Cos. may encourage undue risk taking among investors, Hoenig said. The Fed provided $29 billion in financing to secure JPMorgan Chase & Co.'s takeover of Bear Stearns.

    Stabilize Markets

    The central bank's actions to stabilize markets ``seem likely to weaken market discipline and extend moral hazard problems to a much wider financial marketplace.''

    Fed policy makers in coming months may have to make decisions that defy public preferences, Hoenig said.

    ``There are many challenges ahead, many choices to make,'' he said. ``Some I suspect will be desperately unpopular.''

    Hoenig joined the Fed district bank in 1973 and became its president in 1991. The Kansas City Fed chief is the longest- serving official among district-bank presidents and Fed governors after Gary Stern of Minneapolis.

    To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net;
    Last Updated: May 6, 2008 21:33 EDT
  2. If they follow through on this then it would represent a key (positive) difference to the last rate cut cycle where rates stayed low for too long, even as the economy was clearly recovering.
  3. Hoenig doesn't get a vote, so his voice would be even less than Fisher and Plosser - who DO get a vote and wanted to stop cutting several meetings ago. You see how successful they were at stopping it.
  4. Hoenig didn't say he disagreed with previous cuts. I think the takeaway is they plan to hike swiftly on signs that economic softness gives way to stabilization.
  5. If the Fed doesn't reverse course and begin raising rates we'll be paying $10 for a gallon of gas and $15 for a loaf of bread. The Fed has injected unprecidented amounts of money into the financial system and cut rates at an unprecidented rate. If they don't reverse course we are going to experience unprecidented inflation.
  6. I also think the $ has bottomed. I've been looking for this for several months actually. I wouldn't take a long position here however. Wait for a failed test on next rally of other currencies. I'm looking at 1.57 to 58 area on euro, and other similar movements on JPY, GBR.

    The commodity currencies can really get thumped in my thinking, especially the kiwi.

    At these levels, I just day trade em. mainly just the euro.
  7. And I didn't say he SAID that he disagreed with previous cuts. All I said is that Hoenig's opinion matters even less than that of a voter. And two voters who dissented didn't even sway the tide of cuts, so a non-voter isn't going to hold much weight.

    Ergo, this will be over when Ben wants it to be. End of story.
  8. I didn't know the Fed was in charge of determining the supply and demand for commodities now. Interesting.
  9. I think his logic was based on the not-so-incorrect theory that lower rates causes a weak dollar and a weak dollar continues to spur speculative investing in commodities. But I'm guessing you got what he was trying to say and just wanted to rib him. :)
  10. wouldn't raising rate hinder the effects of expanding and stabilizing the debts market?
    #10     May 8, 2008