What is the Fed Thinking?
Investor’s Daily Edge
July 09, 2007
By Rick Pendergraft
As expected, the Federal Reserve Open Market Committee left the Fed Funds rate at 5.25 percent. This was pretty much a given based on the pricing of Fed Funds futures going into the meeting.
As has been the case for the past six months or so, the important thing was the policy statement itself and whether the Fed would change its focus from inflation to growth. Once again, the FOMC reiterated its policy of targeting inflation as the main concern. They did remove the word “elevated” from their statement regarding inflation this time, which is a step in the right direction. But I am afraid that Mr. Bernanke and company are going to wait too long to lower rates.
As any economics student can tell you, it takes at least six months for a rate cut to work its way into the economy and really boost the activity. While the Fed continues to target inflation, economic conditions continue to slow. Just last week, we saw durable goods orders drop 2.8 percent for May, the worst reading since January.
Consumer confidence hit a 10-month low in May at 103.9. This is a significant drop from the five-and-half-year high the index hit in February (111.2). The drop is the result of declines in both the present situation and the expectations portion. What this says is that consumers don’t see things getting better. Higher gas prices and higher interest rates are the main culprits for the decline.
Here is an interesting take from the Consumer Confidence report: consumers are expecting inflation to run at a 5.4-percent annual pace. This compares to a reading of 4.6 percent in February. Consumers have adjusted their expectations upward based on what they are seeing and hearing (especially from the Fed). However, the Fed is still worried about inflation running at a higher pace than their target rate.
The Fed as a whole has yet to say what their target inflation rate is, but San Francisco Fed President Janet Yellen has used 1.5 percent in speeches in the past few years. Here is my question: why is the Fed setting such a low inflation target when consumers are expecting an inflation rate more than three times as high?
Like most consumers, I am not a big fan of runaway inflation like we saw in the late ‘70s and early ‘80s. However, I have to wonder if the Fed is setting the target inflation rate well beyond an achievable level. Mild inflation is acceptable as long as the economy is growing and consumers are spending, so why try to keep it so low that you risk throttling the economy?
I think it is time for the Fed to shift their focus. Unfortunately I don’t have a vote at the meetings. I can only hope that the Fed does shift its focus in the near future and that they don’t wait until we have entered a recessionary period. It would be too late for their actions to protect consumers.
Ed. Note: Rick Pendegraft has become a recognized expert at combining fundamental and technical analysis with the careful study of investor sentiment. To put his 20 years of market success to work for you, please consider his ETF Options Trader advisory service.
As expected, the Federal Reserve Open Market Committee left the Fed Funds rate at 5.25 percent. This was pretty much a given based on the pricing of Fed Funds futures going into the meeting.
As has been the case for the past six months or so, the important thing was the policy statement itself and whether the Fed would change its focus from inflation to growth. Once again, the FOMC reiterated its policy of targeting inflation as the main concern. They did remove the word “elevated” from their statement regarding inflation this time, which is a step in the right direction. But I am afraid that Mr. Bernanke and company are going to wait too long to lower rates.
As any economics student can tell you, it takes at least six months for a rate cut to work its way into the economy and really boost the activity. While the Fed continues to target inflation, economic conditions continue to slow. Just last week, we saw durable goods orders drop 2.8 percent for May, the worst reading since January.
Consumer confidence hit a 10-month low in May at 103.9. This is a significant drop from the five-and-half-year high the index hit in February (111.2). The drop is the result of declines in both the present situation and the expectations portion. What this says is that consumers don’t see things getting better. Higher gas prices and higher interest rates are the main culprits for the decline.
Here is an interesting take from the Consumer Confidence report: consumers are expecting inflation to run at a 5.4-percent annual pace. This compares to a reading of 4.6 percent in February. Consumers have adjusted their expectations upward based on what they are seeing and hearing (especially from the Fed). However, the Fed is still worried about inflation running at a higher pace than their target rate.
The Fed as a whole has yet to say what their target inflation rate is, but San Francisco Fed President Janet Yellen has used 1.5 percent in speeches in the past few years. Here is my question: why is the Fed setting such a low inflation target when consumers are expecting an inflation rate more than three times as high?
Like most consumers, I am not a big fan of runaway inflation like we saw in the late ‘70s and early ‘80s. However, I have to wonder if the Fed is setting the target inflation rate well beyond an achievable level. Mild inflation is acceptable as long as the economy is growing and consumers are spending, so why try to keep it so low that you risk throttling the economy?
I think it is time for the Fed to shift their focus. Unfortunately I don’t have a vote at the meetings. I can only hope that the Fed does shift its focus in the near future and that they don’t wait until we have entered a recessionary period. It would be too late for their actions to protect consumers.
Ed. Note: Rick Pendegraft has become a recognized expert at combining fundamental and technical analysis with the careful study of investor sentiment. To put his 20 years of market success to work for you, please consider his ETF Options Trader advisory service.
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