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Fed will hike rates again if inflation flares

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Fed will hike rates again if inflation flares

Old 08-16-06, 02:39 PM
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Fed will hike rates again if inflation flares

Fed will hike rates again if inflation flares, Fisher says
Posted 8/16/2006 2:20 PM ET
By Ros Krasny, Reuters
DALLAS Inflation is still the greatest risk to the U.S. economy, and policymakers will not hesitate to raise interest rates again if incoming data suggests that is necessary, Dallas Federal Reserve Bank President Richard Fisher said Wednesday.
"There is a definite increase in inflationary momentum," Fisher told a real estate group. "The Federal Reserve will not tolerate inflation," he added, calling it the Lex Luthor to the "Superman" United States economy. Lex Luthor is the superhero's nemesis.

Inflation "is a sinister force that has the capacity to charm and romance the heck out of you, but in the end wreaks only havoc," he said.

Fisher is the first Fed policymaker to speak publicly since the Federal Open Market Committee voted this month to hold its target for a key short-term interest rate steady at 5.25%.

That decision, taken with a single dissenting vote, ended a string of rate hikes made at 17 consecutive meetings over more than two years. Financial markets are split on whether the Fed will resume its tightening cycle.

Fisher said the Fed "will watch and listen and 'taste' the indicators as they come in."

"If we see, after this pause, that inflation is beginning to threaten economic prosperity, we will take deliberate ... measures to counter it," he said. Even so, "that doesn't mean we need to take a sledgehammer to the economy."

Fisher is not a voting member of the Fed's interest-rate setting committee in 2006.

Price inflation does not typically become entrenched unless accompanied by wage inflation, Fisher said, adding that wage pressures are starting to rise.

"Conversations with CEOs and other business operators all indicate an emerging and widening shortage of skilled and semiskilled workers, along with attendant upward wage pressures."

And more companies are reporting the ability to raise prices with less customer resistance, he said.

Fisher said U.S. gross domestic product growth for the second quarter is likely to be revised closer to a 3% fannual rate rom its initial estimate of 2.5%, and third-quarter growth could be similar.

Still, the U.S. housing market is in the midst of a correction notable for its "suddenness and depth," he said. Fisher said, that, along with high energy prices and higher interest rates, is "definitely having an impact on the consumer." Copyright 2006 Reuters Limited. Click for Restrictions.
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Yeah, no $hit Fisher. To combat ever increasing gas price, our Fed has decided the best weapon is increase interest rate to squeeze disposable income out of consumers. Fantastic!! I love throwing my money away.
Old 08-16-06, 02:54 PM
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When inflation comes, it is nice to own real estate. Go inflation go.

Anyone know the newest unemployment figures.
Old 08-16-06, 02:58 PM
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Originally Posted by kvrdave
When inflation comes, it is nice to own real estate. Go inflation go.

Anyone know the newest unemployment figures.
It is nice to own real state with a strong economy and low inflation as well so let's advocate for the inflationary pressure to remain low. With gas prices going the way they are going though, that will be difficult. I see another rate increase next meeting highly likely.
Old 08-16-06, 03:01 PM
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Funny article, considering Core PPI numbers came in negative yesterday, and Core CPI was less than expected (released today).

Initial jobless claims comes in tomorrow. National unemployment is at 4.8% as of July 2006.

Inflation is actually bad for real estate as it will strip away its value. As you know, inflation and real estate don't always move together.
Old 08-16-06, 03:03 PM
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Originally Posted by elperdido
I see another rate increase next meeting highly likely.
Then buy some Fed Funds Futures and strike it rich. Right now they're estimating a hike in September to have less than a 1 in 4 chance of happening.
Old 08-16-06, 03:12 PM
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I don't see any real problem here. It's looking less likely that the Fed will keep increasing interest rates, the economy is slowing well enough right now at the current interest rates and oil prices.

I'm sure the Fed is trying to reassure the markets that it won't allow runaway inflation, especially since they didn't raise the Fed funds rate at their last meeting. They may also be warning business not to raise their prices too much since there appears to be some room for increasing them due to the difference between the producer price (only up 0.1% in July) and the consumer price indexes.

Consumer Prices Up, Factory Output Slows

Wednesday August 16, 1:23 PM EDT

WASHINGTON (AP) Consumer inflation accelerated in July, reflecting a big jump in gasoline and other energy prices. In evidence that the economy is slowing, industrial output in July slipped to just half the June pace.

The Labor Department reported Wednesday that its closely watched Consumer Price Index rose by 0.4 percent last month, double the 0.2 percent increase in June. While energy costs had fallen in June, they rose by 2.9 percent last month, the biggest increase in three months.

Meanwhile, the Federal Reserve reported that output at the nation's factories, mines and utilities increased by 0.4 percent last month, just half of the 0.8 percent gain in June.

Core inflation, which excludes food and energy, slowed in July, rising by just 0.2 percent after four straight months of 0.3 percent gains. This slowdown, which was helped by a 1.2 percent drop in clothing prices, was likely to encourage officials at the Federal Reserve, who are counting on a slowing economy to reduce inflation pressures.

The rise in industrial production was the slowest since no gain at all in May. Output at manufacturing industries edged up a tiny 0.1 percent, but this weakness was offset by stronger gains in other sectors of the economy.

Output at the nation's utilities shot up by 2 percent in July, reflecting higher production at electric utilities in response to warmer-than-normal temperatures. Output at the nation's mines, a category that also includes oil and gas production, rose 0.8 percent in July, reflecting increased demand for domestic energy supplies.

http://finance.myway.com/jsp/nw/nwdt...&date=20060816
Wall Street Welcomes Tame Inflation Data

By MICHAEL J. MARTINEZ
The Associated Press
Wednesday, August 16, 2006; 2:21 PM

NEW YORK -- Investors bid stocks higher Wednesday after the Labor Department reported tame inflation figures for the second straight day, boosting Wall Street's confidence that the Federal Reserve would keep interest rates steady.

The consumer price index, which measures price increases at the retail level, rose 0.4 percent in July, slightly higher than June's 0.2 percent increase. But with food and fuel prices removed, so-called "core" CPI rose just 0.2 percent, less than the 0.3 percent economists expected.

Combined with Tuesday's producer price index, which showed a decline in core wholesale prices, the data points to a drop in inflation pressures. That would allow the Fed to stop raising rates, which would otherwise threaten economic growth and cramp corporate profits.

"The Fed could not have written these numbers any better to make their case on the economy," said Jack Ablin, chief investment officer at Harris Private Bank. "This, I think, could really help the markets start to move forward."


In midafternoon trading, the Dow Jones industrial average rose 67.80, or 0.6 percent, to 11,298.06.

Broader stock indicators also advanced. The Standard & Poor's 500 index added 6.38, or 0.5 percent, to 1,291.96, and the Nasdaq composite index gained 20.08, or 0.95 percent, to 2,135.09.

Bonds gained on the good inflation news, with the yield on the benchmark falling to 4.87 percent from 4.93 percent late Tuesday. The dollar lost ground against other major currencies, while gold prices rose.

Crude oil futures slipped for the second straight session as tensions in the Middle East continued to cool. A barrel of light crude was quoted at $72.15, down 90 cents, on the New York Mercantile Exchange.

The housing market showed more signs of slowing, which could also motivate the Fed to maintain its current position on rates. Housing starts fell to an annualized rate of 1.795 million in July, down from 1.85 million in June. The number of building permits issued likewise fell.

The slowing economy and steady prices are good for stocks, but traders are watching closely to see whether the rally has staying power. Quincy Krosby, chief investment strategist for The Hartford, said the S&P 500's inability this summer to stay above the 1,280 level _ a key number for market strategists _ has shown some remaining hesitance on the part of investors.

"If we can see the market hold here and then build out, then that may be the beginning of a longer rally," Krosby said. "It really depends on whether this slowing economy affects earnings or not, and we'll have to wait and see for that."

http://www.washingtonpost.com/wp-dyn...081600289.html
Old 08-16-06, 03:15 PM
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Originally Posted by The Bus
Right now they're estimating a hike in September to have less than a 1 in 4 chance of happening.
If gas price continue to stay at a national average of $3/gallon I think the chance of increasing interest rate in September is very likely. Along with the heavy travel around labor day in September, gas price will most likely increase even more.
Old 08-16-06, 03:17 PM
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Originally Posted by SuperJim88
If gas price continue to stay at a national average of $3/gallon I think the chance of increasing interest rate in September is very likely.


Because of the price of consumer goods increasing? Could you explain your reasoning?
Old 08-16-06, 03:21 PM
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Originally Posted by X


Because of the price of consumer goods increasing? Could you explain your reasoning?
My reasoning is strictly based on my first article. Fed will hike rates again if inflation flares. As labor day comes, gas price will jump as demostrated by historical trend. Gas price hike in recent months has been the major factor that caused jump in inflation. Thus, September comes, gas price goes up, inflation flares, fed increase interest rate. (with all else remain constant) My logic flawed? please advice.
Old 08-16-06, 03:22 PM
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What if inflation doesn't flare? What makes you think it's going to increase in percentage over what it is now? Just from oil?

What about all the other things that aren't being purchased due to oil and current interest rates sucking up the money? What does that do to the economy? And then what does that do to interest rates?
Old 08-16-06, 03:29 PM
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Well, obviously if inflation flat lines by a slow economy or lower consumer spending when comes September then everything I said doesn't apply. But I'm just anticipating another hike strictly base on the pressure of increasing gas price. The effect of gas price jump is undeniable, wouldn't you agree?

I'm not claiming a hike in interest rate is all bad because it controls buying power, but nonetheless more money will fly away from my pocket. I don't know which is better.

At this point, I'm leaning toward against interest rate increase simply because interest rate has already been hiked so many times this year. Inflation is, if not controlled, tamed. Hopefully the slow down in consumer spending will be enough to "tame" inflation.

Last edited by SuperJim88; 08-16-06 at 03:33 PM.
Old 08-16-06, 03:36 PM
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Originally Posted by The Bus
Inflation is actually bad for real estate as it will strip away its value. As you know, inflation and real estate don't always move together.
Very true, but just imagine how fun it will be to say that a house purchased for $30,000 is now worth $100,000. Who cares that a new Honda Civic will cost $75,000.
Old 08-16-06, 03:59 PM
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Actually the reason you want to own real estate when inflation is high is that most people have a mortgage and that mortage (given they are on a fixed rate and not some wacky ARM) gets cheaper as inflation and interest rates increase.
Old 08-16-06, 07:25 PM
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Originally Posted by SuperJim88
My reasoning is strictly based on my first article. Fed will hike rates again if inflation flares. As labor day comes, gas price will jump as demostrated by historical trend. Gas price hike in recent months has been the major factor that caused jump in inflation. Thus, September comes, gas price goes up, inflation flares, fed increase interest rate. (with all else remain constant) My logic flawed? please advice.
It sounds like you are just basing your entire knowledge base on the one article. Here's why you are wrong:

1) In the history of the Fed, they have NEVER raised rates after taking a pause in the tightening cycle. NEVER. The Fed is nothing if not predictable.

2) Gas prices are not the major factor in inflation. Certainly it is one of them, but there are many others, such as job rates, consumer confidence, housing numbers, etc.

3) One day of increased demand on petroleum resources is not a reason the Fed will raise rates. It will only add to the record profits of the oil companies.

I just want to point out that the article saying that "rates will increase if inflation flares" is like saying water will freeze and freezing temperatures. That's the whole point of rate increases, to curb inflation. But the article says nothing new, and there's no reason to join Chicken Little in his rhetoric.

Here's a fun read for you:
http://biz.yahoo.com/ap/060816/wall_street.html?.v=20

Last edited by DVD Josh; 08-16-06 at 07:32 PM.

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