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Thursday, April 06, 2006

'Da Bears' or 'Da Bulls' at the Fed?

Chicago Fed president Michael Moskow gave a speech today echoing previous optimistic outlooks for the economy by other Fed officials:

Moskow Calls Recent U.S. Economic Data `Positive', Bloomberg: Chicago Federal Reserve Bank President Michael Moskow said the outlook for U.S. economic growth is encouraging and inflation is under control, making him the fourth Fed member this week to offer such an optimistic view. "The latest economic data have been quite positive," Moskow said ... "At the same time, core inflation remains contained."

Moskow's comments are similar to remarks by Fed presidents Richard Fisher of Dallas, Thomas Hoenig of Kansas City and Jeffrey Lacker of Richmond. While all four expressed optimism about the outlook for growth, none reported signs that inflation is taking off yet. ...

Both Fisher and Hoenig called U.S. growth "robust" in speeches last night. Lacker said, "growth is proceeding on a solid pace this year, and inflation is low and stable" ... "Job growth has been solid in recent months," Moskow said. "The bulk of our productive resources that were underutilized following the 2001 recession are now back at work."

In response to an audience question, Moskow said workers' share of national income should rise as the labor market continues to tighten, and Fed officials will be watching wage gains for signs of inflation. ...

Energy prices also remain a risk to the economy, Moskow said. While rising oil and gas prices haven't had a "significant'' effect on other prices, Moskow said there's still some risk that energy prices will rise more than markets expect and feed into core inflation. ...

Moskow, responding to a question after the speech, said public expectations of future inflation are currently "low." ... "We want to make sure that inflation expectations do not increase," he said.

Moskow and his colleagues expressed comfort with the slowing U.S. housing market. "The slowdown in housing should be an important factor in bringing growth back to potential," Moskow said. "So far, housing has been moderating in a way that is broadly consistent with these forecasts'' for economic growth of about 3.5 percent this year.

Moskow ... said he's not worried about a crash in home prices. "Housing is a different type of asset from equities or bonds and is not as liquid," Moskow said in response to a question. "Even if the rate of increase in prices slowed significantly, I don't think it would have that significant an impact on consumer spending."

The Chicago Fed president said most analysts expect the housing market to slow after five years of record sales. Still, he said the odds are just as good that housing may surprise forecasters by remaining stronger than expected, and that could push economic growth above its long-run potential.

Moskow spent most of his talk discussing the U.S. current- account deficit, which surged to a record $805 billion last year. "An economy the size of the U.S. cannot run large current- account deficits indefinitely," Moskow said. Eventually, foreign investors will reach their desired allocations of U.S. assets" and the current-account gap will shrink.

At some point, investors in China and other countries with growing current-account surpluses will want to invest in their own economies, not in the U.S., he said. "India is a case where this is happening at the moment." Moskow said he's unsure when or how rapidly that will happen, though he suspects "the adjustment will be gradual, without a major disruption to U.S. economic performance."

"The most likely scenario is for a slow decline in the net saving rate by the rest of the world that would induce a gradual contraction in the U.S. current-account deficit," he said. "This probably would not have a major impact on U.S. price pressures or growth, so there is little reason to think that monetary policy would need to react significantly."

Moskow speech
Richard Fisher speech
Jeffrey Lacker speech
Report on Thomas Hoenig's comments

    Posted by on Thursday, April 6, 2006 at 12:42 PM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (0)  Comments (8)


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