Interest Rate Roundup

Wednesday, November 15, 2006

Fed officials "Tawk amongst themselves"

Every few weeks, we learn about the Fed's "coffee tawk" -- specifically, what they said at their most recent Federal Open Market Committee meeting. Minutes were just released for the October 25 gathering. You can read the whole document here, if you need some help sleeping. But I'll sum it up thusly...

The Fed made it abundantly clear that it does NOT plan to cut rates any time soon. Policymakers couldn't be more clear if they flew a blimp over the Super Bowl saying "Read our lips: No cuts are coming." They view taming inflation as job #1. A key comment: "All members agreed that the risks to achieving the anticipated reduction in inflation remained the greatest concern."

Moreover, Fed officials hinted that their fears about economic growth were easing. Specifically, they said: "Most members judged that the downside risks to economic activity had diminished a little."

Yes, commodity prices (including energy) have come down from their peaks. That helped suppress producer prices last month. But wage pressures remain elevated. And outside of housing, there are few signs of widespread economic stress. Credit spreads remain tight. The stock market is going up practically every day. Money supply growth is exploding all over the world. Plenty of other indicators also suggest the liquidity hose is stuck on "wide open." In my view, the Fed simply can't afford to cut rates in this environment.


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