Thursday, February 28, 2008

Tim Duy's Fed Watch

by Calculated Risk on 2/28/2008 03:12:00 PM

From Dr. Tim Duy at Economist's View: This Train Doesn’t Stop

A choice has to be made in the short run. Focus on inflation, and hold policy relatively tight? Or focus on growth, hoping that soft economic growth will tame inflationary pressures? The Fed continues to choose the latter path.
The die is cast. Look for another 50bp in March and then two more 25bp cuts at subsequent meetings to bring the Fed Funds rate to 2%.
And on inflation:
Inflationary pressures are building globally (note that China is completing the chain that leads to an inflationary spiral, setting the expectation that high inflation will be matched by higher wages), reflected in surging commodity prices and the freefall of the dollar. The former is weighing heavily on US consumers. Indeed, I am amazed that this story is only starting to capture the attention of the press. So much attention is placed on the housing market as the source of declining consumer confidence, but over the last three months, headline CPI has surged 6.8% annualized. Sure doesn’t look like nominal wages gains are keeping up. No wonder confidence is collapsing.

And I sense it’s going to get worse ...
Tim Duy is very good at looking inside the Fed's thinking. Unfortunately, the situation isn't pretty.