Inflation vs. Growth – Mixed Message from Fed?
We have heard Chairman Bernanke and seen the minutes of the June 24-25 FOMC meeting in the past week. Inflation was seen at the top of the list of concerns in the inflation-growth debate when the policy statement was published. The Financial Times has a story running about this debate (Fed seems focused on inflation over growth) today. The minutes and policy statement left the impression that inflation is the most important issue for the FOMC. Chairman Bernanke’s testimony on July 15 changed the focus to growth and reduced the importance of inflation while continuing to point out the importance of containing inflation and inflation expectations. Effectively, he reduced the rank of inflation marginally in the inflation-growth debate. Fed President Plosser’s (voting member of FOMC) hawkish remarks this morning highlight his preference of focusing on inflation. For the record, President Plosser dissented at the March 18 FOMC meeting when the Fed lowered the federal funds rate 75 bps points to 2.25%. He would have preferred less aggressive action. The April 24-25 meeting ended with the Fed bringing down the funds rate 25 basis points to 2.00%. President Plosser would have preferred to have left the federal funds rate unchanged. President Plosser did not dissent at the June meeting, while President Fisher would have preferred a higher federal funds rate. President Fisher has dissented at the January, March, April, and June FOMC meetings. In our opinion, dissent and open discussion are important in the process of policy making but the Chairman’s vote carries more weight. True, it is a tough call for the FOMC in the current challenging environment. It is at the same time important to recognize that the Fed is not in a position to raise rates until there is financial market stability, the housing market crisis improves, and firms decide to expand their payrolls. Concerns about economic growth will prevail over inflation, for now. In other words, tough talk about inflation will continue but it cannot be translated into action in the near term.
Declining Trend of Home Prices Continues
The House Price Index (HPI) published by the Office of Federal Housing Enterprise Oversight (OFHEO) fell 0.3% in May, following a 0.8% drop in April. The month-to-month change is encouraging but the underlying trend remains bothersome. On a year-to-year basis, the HPI declined 4.8% in May after a 4.6% drop in April. This is the largest drop in the HPI in the short history of the index which began in 1991. The tally for sales of existing and new homes in June will be published on July 24 and 25, respectively, which should give us more information.
