August 24, 2015
THE HIGH COST OF A FED CHAIRMAN'S HAWKISH BONA FIDES:
No time for an interest rate hike (Lawrence Summers, August 23, 2015, Washington Post)
The Fed is under pressure to hike rates just to prove that Ms Yellin would raise rates, not because underlying economic conditions support a hike. Indeed, the deflationary conditions suggest a rate cut is more appropriate.The Fed, like most central banks, has operationalized price stability in terms of a 2 percent inflation target. The dominant risk of missing this target is to the downside -- a risk that would be exacerbated by tightening policy. At present, more than half the components of the consumer price index (CPI) have declined over the past six months for the first time in more than a decade. Core CPI (excluding volatile food, energy and difficult-to-measure housing) is rising at less than 1 percent, and the most recent comprehensive measure of inflation costs rose at an annual rate of 0.7 percent over the past quarter. Critically, market-based measures of inflation expectations over the next decade suggest that it will be well under 2 percent. If, as now seems likely, the currencies of China and other emerging markets further depreciate, downward pressure on U.S. inflation rates will increase.
Posted by Orrin Judd at August 24, 2015 3:17 PM
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