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Friday, January 13, 2006

Chicago Fed's Moskow: Further Tightening May Be Needed

Chicago Fed president Michaels Moskow's speech begins with an extensive review of the outlook for economic growth and inflation. Since the review is essentially along the lines of other what other FOMC members have expressed previously, after a few summary statements I'll skip forward to his statements about policy. Given the robustness of economic growth, he favors increasing the target rate so long as there is any hint of long-run inflationary pressure and thus, for him, policy depends critically on new information concerning the outlook for inflation:

U.S. Economic Outlook, by Michael H. Moskow, Chicago Fed President, January 12, 2006: Over the last two years, real gross domestic product has been growing an average of 3.7 percent each year. This is somewhat faster than potential, or the rate of GDP growth that can be sustained without creating inflation pressures. ... The unemployment rate has fallen to 4.9 percent; at the Chicago Fed, we think that this rate is roughly consistent with an economy operating at potential. In addition, the capacity utilization rate in manufacturing has nearly reached its historical average. ... Finally, core inflation has changed only modestly in recent months. ... According to the Blue Chip consensus, real GDP growth is expected to average about 3-1/4 percent over the next two years—close to recent estimates for potential. And Blue Chip projects the unemployment rate will stay a bit below 5 percent through the end of next year. ... Given the fundamentals, I think the Blue Chip forecast is reasonable. But there certainly are some risks. ...

The latest readings on the core price index for personal consumer expenditures ... have been favorable.... Still, for most of this past year, core PCE inflation has been running close to 2 percent, which is at the upper end of the range that I feel is consistent with price stability. ... Fortunately, current financial market data and consumer surveys suggest that long-run inflation expectations remain contained. Nonetheless, it will take appropriate monetary policy to keep inflation and inflation expectations contained. For me, this likely entails some further policy action. Whatever actions are taken, however, will depend on economic conditions. ...

Conceptually, it's easiest to think about the neutral—or equilibrium—rate as being the rate consistent with an economy growing steadily along its potential growth path over a long period of time. ... By such measures, we're currently in the bottom end of this range. Of course, this is a rough estimation. ... But there is another very important point to emphasize. Even if the funds rate were at neutral, further changes in policy might be appropriate. ...[A]s I mentioned earlier, there are risks to the inflation outlook—namely, the potential for energy cost pass through, pressures from increases in resource utilization, or rising inflationary expectations. ... My views about policy will depend importantly on how various cost factors play out and affect the outlook for inflation. ... if inflation or inflation expectations were to rise persistently, then policy clearly would have to be tightened further. Of course, other events could transpire that result in prospects for inflation and growth that would be consistent with a less firm policy stance. ... policy will not be a mechanical reaction to the next number on inflation or employment. ...

There is quite a bit more in the speech on these and other topics such as national savings and education.

    Posted by on Friday, January 13, 2006 at 12:15 AM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (1)


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