I'm not buying it. He's being hawkish because he has to. Inflation is taking hold, and if the dollar continues to fall, as it started to after the FOMC meeting, inflation will accelerate faster. His hawkish talk had the effect of propping up the dollar, for now. Don't expect it to last long. The economy is in worse shape than he or any of the political parties, even the Democrats, have let on. He's trying to talk up the economy for now, while giving signals that things could be getting worse to anyone who chooses to analyze his statements closely. In the future, whether the economy continues to expand or not, you can look at his statements of this summer and find that they supported either conclusion.

Wolf!

How can the economy be in "bad" shape when employment is picking up, home prices remain stable, corporate profits are skyrocketing, and manufacturing employment is at a twenty-year high ?

Surely someone should have picked up on how bad things really are, no ?

Michael, many people are picking up on it. Here are a few:

http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2004/IO_07_04.htm

http://www.reuters.com/financeNewsArticle.jhtml?type=bondsNews&storyID=5748712

http://money.cnn.com/2004/03/06/pf/buffett_letter/

http://www.kitco.com/ind/GoldReport/june232004.html

Here are some quotes from the Fed's July Monetary Policy Report and the Chairman's testimony before Congress:

"Some risks necessarily attend this transition, but they are outweighed in our judgment by those that would be associated with maintaining the existing degree of monetary policy accommodation in the current environment. Although many factors may affect inflation in the short-run, inflation in the long-run, it is important to remind ourselves, is a monetary phenomenon."

So in the long run, due to the unprecedented monetary accomodation of the last 4 years, we will have inflation.

"As firms compete to take advantage of profit opportunities, they may eventually be forced to absorb a portion of any increases in labor and other costs that occur. But history suggests that the absorption of costs has limits. Indeed, unit labor costs have turned up of late, as productivity growth has slowed below the rate of increase in hourly compensation. If increases in those costs were to develop any upward momentum, the well-behaved nature of inflation in recent years could be jeopardized."

Count on it.

"With financial markets quite accommodative, the Committee recognized that maintaining the current stance of policy could fuel inflation pressures and perhaps encourage excessive risk-taking by financial market participants. The Committee concluded that the low level of core consumer price inflation and continued evidence of weak hiring argued for the retention of both its 1 percent target for the federal funds rate and the wording in its statement that the Committee could be "patient" with respect to changes in monetary policy.""

They know that they've let the accomodation go on too long and have given inflation a good head start. Rates will rise, whether the economy slows down or not. They've given it their best shot, and can only hope for the best, but rates will definitely rise. They are spinning it as positively as they can.

Robert:

Then those companies will go under. Folks in other countries don';t face the same pressure and will make the same stuff cheaper. That's how globalization works and why inflation can't return for some decades at least.

So you are saying that either these companies eat their cost increases and lower profits or they go under. So were is all the economic prosperity going to come from?

Yes. They have plenty of room to do so--profits are quite high and any cost increases are certainly temporary, as energy has proved.