The minutes of May 10 FOMC meeting were released today.
Here are a few key snips:
Participants discussed in some detail inflation expectations–a potentially important factor influencing future inflation trends. Some surveys suggested that inflation expectations had risen in recent weeks, but others implied that expectations were little changed.
On balance, participants judged that inflation expectations had risen somewhat–a development that would have to be taken into account in policymaking and warranted close monitoring–but remained contained.
Although the Committee discussed policy approaches ranging from leaving the stance of policy unchanged at this meeting to increasing the federal funds rate 50 basis points, all members believed that an additional 25 basis point firming of policy was appropriate today to keep inflation from rising and promote sustainable economic expansion.
Recent price developments argued for another firming step at today’s meeting. Core inflation recently had been a bit higher than had been expected, and several members remarked that core inflation was now around the upper end of what they viewed as an acceptable range. Moreover, a number of factors were augmenting the upside risks to inflation: the surge in energy and commodity prices, some recent weakness in the foreign exchange value of the dollar, and the possibility that the apparent increase in inflation expectations could, if it persisted, impart momentum to inflation
At the same time, members also saw downside risks to economic activity. For example, the cumulative effect of past monetary policy actions and the recent rise in longer-term interest rates on housing activity and prices could turn out to be larger than expected. Still, it seemed most likely that, with modest further policy action, including a 25 basis point firming today, growth in activity would moderate gradually over coming quarters, pressures on resources would remain limited, and core inflation would stay close to levels experienced over the past year.
Given the risks to growth and inflation, Committee members were uncertain about how much, if any, further tightening would be needed after today’s action. In view of the risk that the outlook for inflation could worsen, the Committee decided to repeat the indication in the policy statement released after the March meeting that some further policy firming could be required.
Members debated the appropriate characterization of inflation expectations in the statement. Low and stable inflation expectations were key to the attainment of the Committee’s dual objectives of price stability and maximum sustainable economic growth. However, the apparent pickup in longer-term expectations, while worrisome, was relatively small. They remained within the range seen over the past couple of years, and the increase could well reverse before long. Accordingly, it appeared appropriate to characterize inflation expectations again as “contained.”
Dow Jones summed it up as follows:
*DJ FOMC: May Minutes: Upside Inflation, Downside Econ Risks
*DJ FOMC: Debate Ranged From No Fed Funds Change To 50BP Hike
*DJ FOMC: Rise In Price Expectations ‘Worrisome’ But Small
*DJ FOMC: Inflation Expectations Warrant ‘Close Monitoring’
*DJ FOMC: Staff Forecasts Inflation To Slow Later In ’06
*DJ FOMC: Unsure How Much ‘If Any’ More Tightening Needed
*DJ FOMC: Lagged Rate Impact On Housing Could Be Larger
*DJ FOMC: Lower Dollar Could Add To Inflation Pressures
Fed in a Box
Those minutes prove the Fed is in a box and is essentially clueless about what to do. Some wanted to pause while others wanted a 50BP hike. In the end they all agreed to go down on the sinking ship together by agreeing to agree. It was a unanimous vote in favor of a 25 BP hike.
At least in the UK we see policy makers willing to dissent. The last BOE meeting had a three way split with some voting to pause, some to hike, and one to cut.
It is notable that finally after 16 consecutive rate hikes the Fed finally put a 50 basis point rate hike on the table just as housing is getting crucified in many places. They are also worried about inflation expectations while at the same time unsure if any more hikes are needed.
I have said it before and will repeat it again. The lagging effects of 16 consecutive hikes, in light of action in housing as well as rising bankruptcies makes it extremely likely the Fed has already overshot.
Given that this Fed created the housing bubble in the wake of a stock market bubble the Fed also helped create, why anyone thinks the Fed has any clue what they are doing is simply beyond me. Past bubbles and those minutes clearly prove the Fed is guessing. Then again, given that the greatest liquidity experiment in the history of mankind was openly undertaken by numerous central banks over the last few years (most notably the Fed and the BOJ) it should not be too surprising that the Fed is guessing.
We can top that off with $Ben Bernanke who actually believes price targeting can work in a global economy burdened by peak oil, outsourcing, trillions of dollars of derivatives floating around, and interest rates ranging from 0% in Japan to 2% in Europe to 5% in the US. All I can say is that it can’t be done.
Bernanke is the wrong person for the wrong job at the wrong time. For more discussion on the silliness of price targeting, please consider Inflation Monster Captured. Targeting prices is like trying to catch your tail. The job is wrong because the job should not exist. The man is wrong because price targeting can’t work. The time is wrong simply because it was never right and never will be. The Fed should be abolished and the market should set rates. The market can not possibly do any worse than the bubbles blown by the Greenspan and Bernanke Fed.
The Fed is in a quandary because of the mess they helped create. There are no good solutions from here, yet the talk from Wall Street is as if some sort of miracle soft landing that keeps the consumer spending without going bankrupt is about ready to happen. No chance.
Mike Shedlock / Mish/