Chicago Fed’s Michael Moskow Defends Further Rate Increases

This is unequivocal.  Michael Moskow, president of the Chicago Fed, believes further rate increases are necessary:

Fed's Moskow Sees More Inflation Risk, Higher Rates, Bloomberg:  The Federal Reserve must keep raising interest rates because the economy is growing near its full potential and inflation is at the high end of the acceptable range, Michael Moskow, president of the Chicago Fed, said in a speech. ''Core inflation is now at the upper end of the range that I feel is consistent with price stability,'' Moskow said ... ''Appropriate policy means that we continue to reduce accommodation and return to a neutral federal funds rate,'' ... Moskow didn't give an estimate of the neutral rate that would keep the economy growing without spurring inflation. … ''If we do not remove that accommodation, or raise rates, then you risk significantly higher inflation in the economy,'' he said … ''inflation this year and next is likely to come in at the high end'' of the Fed's forecast of 1.75 percent to 2 percent...

Moskow, 67, has been president of the Chicago Fed bank since 1994 and is a voting member of the Federal Open Market Committee this year. He has never dissented on a rate decision, joining Chairman Alan Greenspan in the majority on every vote. … ''The risk is higher than it was a year ago,'' he said. ''Because the economy is running nearer to potential, unfavorable cost developments are more likely to pass through to core inflation.'' … Moskow told reporters … that there is little evidence that the increase in oil prices is changing consumers' habits. ''So far the increases have not had a noticeable impact on demand,'' he said. ''Will it have a more significant impact in the future? I don't think anybody knows for sure. ...'' … He said he expects ''solid growth'' in consumer spending because ''employment gains have increased incomes, rising equity and home prices have boosted wealth, and currently households are not experiencing difficulty servicing their debt.'' … Along with inflation, Moskow said the risks to growth include rising oil prices, the large U.S. current account deficit and a possible decline in home prices.

Moskow also said the economy has reached full employment ... ''While unemployment was lower in the late 1990s, at the Chicago Fed we think that given current economic circumstances, 5 percent is about as low as the unemployment rate can go on a sustained basis,'' he said. … ''Financial market data and surveys suggest that the private sector's long-run inflation expectations remain stable,'' he said. If higher oil prices or ''a string of higher inflation numbers'' threaten to increase inflation expectations, ''the Fed would need to respond accordingly in order to restore price stability,'' he said. ''Those of us who lived through the period of the late 60s, the 70s and even the early 80s remember how painful that was and how deleterious high rates of inflation are,'' Moskow said in response to a question from the audience. ''So it's very important, very important, that we keep inflation contained.''

Comments

[anne]

http://www.nytimes.com/2005/08/25/realestate/25rent.html

August 25, 2005

Rents Head Up as Home Prices Put Off Buyers
By DAVID LEONHARDT

Rents are rising again across the country, squeezing tenants who are already coping with high gasoline prices and improving returns to landlords after a deep five-year slump.

The turnaround appears to be another sign that the boom in house prices and sales is finally slowing, as homes have become so expensive in many metropolitan areas that some people have decided to rent instead.

A government report yesterday also offered new evidence that the housing boom could be reaching a peak. The median price of a newly built home fell to $203,800 in July from $219,500 in June, after having risen in the winter and spring, the Commerce Department said.

Still, the number of new homes that were sold continued to grow, and economists cautioned that the recent housing slowdown could turn out to be a pause.

But rents have clearly changed direction, even if the increases have been relatively small. With the economy growing and mortgage rates inching up, more people are looking to rent apartments and homes rather than buy them. At the same time, many buildings are being turned into condominiums, reducing the supply of rental property....

[anne]

Sure, sure, sure. Enough with international buyers, why with a host of threats from Federal Reserve executives is the yield on the long term Treasury bond 4.17%? Rates are going up, the economy is at full employment or above, inflation is inflating, but we have a 4.17% Treasury :)

[anne]

http://flagship2.vanguard.com/VGApp/hnw/FundsVIPERByName

Sector Stock Indexes
12/31/04 - 8/24/05

Energy 33.1
Financials -1.8
Health Care 5.3
Info Tech -1.7
Materials -6.0
REITs 8.0
Telecoms -0.1
Utilities 15.4

[anne]

Now, I have a serious problem. I am trying to decide if I am fashionable or mature enough or both to shop at the new Gap stores. Fashionable, definitely, but but but :)

[anne]

Heck, anyone can raise interest rates. Where is the problem in that? Shopping or not at the Gap, now there is a real life problem.

[Mark Thoma]

Ah, what the heck, go for it!

[Lord]

Those that sold to rent may end up mightily disappointed if that continues.