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June 06, 2006

The Hawk Becomes The Pheonix

The New York Times sums up the interpretation of yesterday's remarks by Chairman Bernanke at the International Monetary Conference in Washington D.C.: 

Ben S. Bernanke, chairman of the Federal Reserve, warned Monday that recent inflation trends were "unwelcome developments," indicating that he was far less worried about signs of weaker economic growth than about the danger of higher prices.

I added the emphasis there, as I did read the speech, and confess I couldn't quite find where he said he was "far less" worried about economic growth.  To be fair, an impartial observer might infer that this does represent the Federal Open Market Committee's general orientation, based on the change from this language in the press statement following the March meeting...   

The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.

... to this language in the statement following the May meeting:

The Committee judges that some further policy firming may yet be needed to address inflation risks...

Of course, everyone knew this last week when the May employment numbers sent expectations of another rate hike in June into a skid. Apparently, on Friday those numbers made operative this clause in the May statement...

The Committee... emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information.

... and just as apparently market participants believe the invoking of that clause was revoked by the Chairman in his comments on Monday.  Again from the New York Times:

In his toughest comments yet about the risks of inflation, Mr. Bernanke said consumer prices were rising faster than he would like. He gave short shrift to evidence of a slowdown in hiring, and he conspicuously avoided repeating his earlier suggestion that the Fed might consider a "pause" in its two-year program of steady interest rate increases.

The story, from prices on options for fed funds futures:

   

June_19

   

August_6

I know I said I would stop posting these things unless something interesting happens, but, by golly, interesting things just keep happening.

The data from the above picture, as is always the case now, are available from the Cleveland Fed.   

June 6, 2006 in Fed Funds Futures, Federal Reserve and Monetary Policy | Permalink

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Comments

The key element of Bernanke's speech was his use of the word "unwelcome" to describe recent core inflation numbers. The effect was to draw a line in the sand at 2 percent, analogous to Greenspan's use of the u-word to describe core inflation below 1 percent. One could even argue that the FOMC now has an implicit numerical inflation target of 1 to 2 percent for the core PCE price index.

Posted by: lowsmoke | June 07, 2006 at 09:06 AM

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