Interest Rate Roundup

Thursday, May 08, 2008

Officials ratcheting up their inflation-fighting rhetoric

In the "Things that make you go Hmmm" department, key policymakers and officials are ratcheting up their anti-inflation rhetoric. This is a change from what we've seen over the past several months, where inflation concern was relegated to the back seat and everyone was falling all over themselves to slash rates and flood the markets with money to stave off the credit crisis. Just consider:

* Earlier this week, Kansas City Fed President Thomas Hoenig stepped up to the microphone this week in Denver and said the following:

“There is significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it." He added that he’s seeing an “inflation psychology to an extent that I have not seen since the 1970s and early 1980s.”

* Today, Bloomberg is reporting on some comments from the deputy chief at the International Monetary Fund, John Lipsky. An excerpt from the story:

"Inflation is reemerging as a threat to economic stability after years of "quiescence,"' and officials must be wary of policies that stoke consumer prices, the International Monetary Fund's deputy chief said.

"This inflation speed-up must be taken seriously as it creates potentially significant challenges to economic stability," John Lipsky, the IMF's first deputy managing director, said in a speech in New York today. A return to 1970s- style high inflation and rising price expectations "cannot be discarded out of hand,'' he said.

"While the surge in energy and other commodity prices is the main cause of the danger, low central bank interest rates and a falling dollar are also contributing, Lipsky said. Speaking after the European Central Bank kept its main rate at a six-year high, the official said the inflation outlook "appropriately is central'' to European policy makers' priorities.

"In the U.S., as growth "recovers,'' consumer-price developments will "assume greater importance'' for the Federal Reserve, said Lipsky, a former JPMorgan Chase & Co. chief economist who joined the IMF in 2006.

"Low interest rates have a statistically significant impact on commodity prices'' according to preliminary evidence, the IMF official said. "Exchange-rate shifts also appear to influence commodity prices."

* Meanwhile, ECB president Jean-Claude Trichet continues to talk about the inflation threat, noting that "Our fellow citizens are not happy with the present level of inflation" and that "there's no time for complacency in any respect" as far as inflation expectations are concerned.

As I've been noting for some time, the Fed's aggressive rate cuts and extraordinary efforts to grease the credit market wheels have caused problems elsewhere in the economy. They have driven real interest rates well into negative territory, and that is helping contribute to the run up in commodity prices, as well as generalized inflation.


Post a Comment

<< Home

Site Meter