When to Hit the Pause Button?

The Wall Street Journal has a summary of Ben Bernanke's written remarks from his testimony before the Senate Banking Committee. The message is the same, growth is moderating but inflation remains a concern:

Link to video of hearing (CSPAN - expires in 15 days).

Bernanke Sees Inflation Pressures Declining as Growth Moderates, by Brian Blackstone and Campion Walsh, WSJ: Federal Reserve Chairman Ben Bernanke said Wednesday a moderation in U.S. growth "now seems to be under way," which "should help to limit inflation pressures over time."

While noting that some of the recent rise in underlying inflation is due to technical factors and that inflation expectations "remain contained," inflation remains "of concern" to policy makers, Mr. Bernanke said in semiannual monetary policy testimony prepared for delivery to the Senate Banking Committee. ...

Also, CPI figures were released today and core inflation was up a bit more than anticipated adding to inflation worries:

Earlier Wednesday, the Labor Department reported that the June consumer price index increased 0.2%. Excluding food and energy, consumer prices advanced 0.3%, the fourth-straight rise of that size. Fed chairmen receive major economic reports, including consumer prices, the evening before they're released to the public. ...

The Wall Street Journal also reports market reactions:

Markets reacted immediately to the numbers. Stock futures gave up early gains, on the expectation the Fed will be more likely to raise interest rates again in August. The federal-funds futures contract at the Chicago Board of Trade, where traders bet on future Fed policy, priced in a 90% chance of a quarter-point August increase, compared with 68% before the consumer-price release....

Those of us who would like to see the Fed take a breather in its rate hike campaign to avoid overshooting aren't getting a lot of help from the inflation reports.

Update: The markets have changed their mind after hearing Bernanke's comments:

After struggling amid concerns about the Mideast conflict and rising oil prices, stocks surged Wednesday after Federal Reserve Chairman Ben Bernanke indicated in Congressional testimony that the central bank may stop raising interest rates soon.

The comments, delivered before the Senate Banking Committee, reversed earlier concerns about further rate increases inspired by a report that showed a measure of retail price inflation is rising at a faster pace than expected.

I'll update this later when summaries of Bernanke's remarks in response to questions are available.

Note: If you don't have a WSJ subscription, here are links to Bloomberg reports:

• Bernanke, Hinting at Pause, Says Fed to Mind Effects of Prior Rate Boosts
• Stocks in U.S. Climb on Fed Chief's Comments; Shares of IBM, JPMorgan Gain
• Treasuries Rise After Bernanke Says `Moderation' of U.S. Economy Under Way
• U.S. Consumer Prices Gain 0.2 Percent; Housing Starts Fall as Demand Slips

Update: Tim Duy is working an a new Fed Watch for tomorrow, so I will let him put the remarks into perspective. For now, here's Greg Ip and Mark Whitehouse of the WSJ with a summary of Bernanke's remarks:

Bernanke Sees Inflation Pressures Declining as Growth Moderates, by Greg Ip and Mark Whitehouse: Federal Reserve Chairman Ben Bernanke called rising inflation a "concern" but predicted an economic slowdown would reverse that rise. Markets took those words to mean that, for now, the Fed will worry more about slowing growth and stop raising interest rates soon. Bond yields fell and the Dow Jones Industrial Average soared Wednesday.

Mr. Bernanke spoke the same day as the government reported inflation rose and home construction fell last month, underlining the opposing risks confronting the central bank.

"The recent rise in inflation is of concern," Mr. Bernanke told the Senate Banking Committee. "Possible increases in [energy] and other commodity prices remain a risk to the inflation outlook."

But Fed policy makers "project that growth … should moderate" to its long-term potential rate "both this year and next. Should that moderation occur as anticipated, it should help to limit inflation pressures over time."

Part of Mr. Bernanke's job Wednesday was to blunt accusations of sending inconsistent messages since taking the post on Feb. 1. ... Wednesday, he appeared to seek ... balance by acknowledging that inflation was too high but laying out a forecast of slowing growth and stable energy prices that would allow inflation to fall back. And, in an important break from the past few years, he gave no explicit signal about how the Fed would move interest rates to achieve that forecast, forcing markets to decide for themselves...

Update: See David Altig at macroblog for an analysis of today's price report.

Comments

[nyuk]

Senator Bunning insists that the Fed "...is chasing an inflation monster that just isn't there..."

Who agrees with him?

[anne]

This is a singular price cycle in which the Federal Reserve appears to have done a superb job of limiting inflation. Core inflation is better contained than in any Fed tightening sequence since 1980, but we have experienced a rough eneregy price increase and are in the midst of rounds of tax cutting and a war and occupation to accentuate spending. The American economy has grown increasingly resilient and adaptive these 25 years, and evidently resistent to inflation.

[anne]

Actually, the bond market is also telling us that the Federal Reserve will be raising short term rates but that long term inflation is not going to be a problem. The bond market could not be much calmer, and a Treasury long term interest rate of 5.1% is indicative of fine investor confidence at this evidently late stage in the Fed tightening sequence. Notice also that the dollar is holding well, stocks are holding and commercial real estate is strong.

[anne]

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

Vanguard Fund Returns
12/31/05 to 7/18/06

S&P Index is 0.0
Large Cap Growth Index is -5.1
Large Cap Value Index is 4.9

Mid Cap Index is -0.7

Small Cap Index is 0.9
Small Cap Value Index is 4.0

Europe Index is 7.8
Pacific Index is -3.7
Emerging Markets Index is 1.2

Energy is 12.9
Health Care is 1.5
Precious Metals is 20.3
REIT Index is 14.4

High Yield Corporate Bond Fund is 1.4
Long Term Corporate Bond Fund is -4.9

[nyuk]

I find it disturbing that there is any inflationary pressure at all in the absence of rising (real) wages.

[anne]

NYUK

"I find it disturbing that there is any inflationary pressure at all in the absence of rising (real) wages."

An incisive comment, to which we should consider adding seemingly limited or no benefit increases, even falling benefits for all too many workers.

[Movie Guy]

anne - "This is a singular price cycle in which the Federal Reserve appears to have done a superb job of limiting inflation. Core inflation is better contained than in any Fed tightening sequence since 1980..."

During this business cycle, the Fed Reserve was operating from a floor of exceedingly low interest rates during this business cycle. Not zero, of course, but very low.

At best, the Fed Reserve has only thus far managed to pull short term interest rates back up to normal levels. The Fed has accomplished little more. Frankly, the Fed started too late in raising its two interest rates.

That businesses were flush with cash, enjoyed record profits, and employment practices and trade policy put considerable pressure on wage levels, weakening provision of pensions, and employment healthcare coverage has more to do with inflation containment that Fed actions.

That businesses did not proportionally match GDP growth with business investment expenditures, as noted by Don Kohn, may have played a role in containing inflation. Yet, the Fed Reserve is openly complaining about the lack of additional business investment during this business cycle.

Can you cite a list of examples whereby the Fed Reserve actions have limited inflation since 2000?

It's not the case with the majority of consumer goods, as those are primarily imported.

It's not energy prices.

It's not food prices.

It's not intermediate materials and goods.

It's not services.

It's not housing.

It's not real wages, as they are still lagging inflation.

Where is the evidence of this fine inflation containment effort by the Fed Reserve?

I'm not knocking the Fed Reserve, but I will not give its leadership cheerleading credit for things that the Fed did not do. At best, the Fed is now mopping up the excess liquidity that it created.

[Movie Guy]

"During this business cycle, the Fed Reserve was operating from a floor of exceedingly low interest rates during this business cycle."

Should read:

The Fed Reserve was operating from a floor of exceedingly low interest rates during this business cycle.

[hj]

Inflation has been rising steadily since 2002. CPI-U has the following:

2002-----1.6%
2003-----2.3%
2004-----2.7%
2005-----3.4$
And now June 2006 over June 2005-----4.3%

[anne]

Again, let the bond market analyze how to look at inflation prospects and the bond market is decidedly telling investors core inflation is under control by the Federal Reserve which should be coming to the finish of the tightening cycle in a reasonable time before growth is seriously threatened. When institutional bond investors are confident I am confident, and a long term Treasury yield of 5.05% is reason to be secure.

[Movie Guy]

anne,

I am familiar with bond market activity.

That wasn't my question.

You stated: "This is a singular price cycle in which the Federal Reserve appears to have done a superb job of limiting inflation."

I asked: "Can you cite a list of examples whereby the Fed Reserve actions have limited inflation since 2000?"

The question remains unanswered. Answering it is your choice, but misdirection doesn't answer the mail.

And you have mail.

[hj]

Roubini sees 6% by early 2007. Inflation in his view is still rising.

http://www.rgemonitor.com/blog/roubini/137103/

[quiz]

Housing: up 250 %

Oil: up 350 %

Metals: up 400 %

Wages : ?

Job Growth ?

This is a speculator's market in which the Fed and their ilk are the prima balerinas.

The long bond hasn't functioned as a good indicator of inflationary pressure during this cycle. The great Greenspan has dubbed it a "conundrum'. Arthur Burns Bernanke has called it a "savings" glut.

The Fed has been busy patting themselves on the back because inflation, as they measure it, has been diffused by shipping the middle class jobs of the American manufacturing sector (and now high tech) to near slave labor foreign competitors. Meanwhile, they continue feeding the speculative wall street pigs with cheap money and doubling as their whore.

We should all be proud.

[Tymbrimi]

Actually, inflation is quite tame. Over the last 12 months, core inflation has only risen 1.9%. :)

says...

You can make inflation numbers almost whatever you want them to be, by excluding this and that. Rather like pro forma earnings. I prefer the CPI-U number that says inflation has been 4.3% over the last twelve months.