Fed hints at end to US rate rises ~ Stocks rally

BBC ^ | Tuesday, 18 April 2006, 20:18 GMT 21:18 UK | staff

[Ernest_at_the_Beach]

Fed hints at end to US rate rises

Inflation remains a key issue for Fed Reserve boss Ben Bernanke

The US Federal Reserve has hinted that its policy of raising interest rates could be approaching an end.

Minutes from the Federal Open Market Committee (FOMC) revealed that most members believed "the end of the tightening process" was near.

The Fed Reserve raised rates in March for the 15th time in a row to 4.75%, the highest level since April 2001.

The eagerly awaited FOMC minutes were the first covering a meeting held by new Fed Reserve chairman Ben Bernanke.

The prospect of an end to interest rate rises helped push the Dow Jones index up by almost 2% to 11,262.04 in late US trade.

Inflation risks

I think it's important to recognize that inflation is where the Fed wants to be - they don't want to overshoot, I think they will pause real soon Dana Johnson Chief economist, Comerica Check Wall Street shares

Mr Bernanke took over from his veteran predecessor Alan Greenspan in January, and analysts have been keen to see in which direction he plans to take the Fed Reserve.

Under Mr Greenspan, the Fed Reserve pursued a policy of gradual interest increases with the aim of cooling inflationary pressures.

But according to minutes from the March's FOMC meeting "most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy".

However, members "also recognised that in current circumstances, checking upside risks to inflation was important to sustaining good economic performance".

Analysts still expect the Fed Reserve to increase the cost of borrowing by a further quarter percentage point in the near future.

But many believe any rise to 5% would mark - at least for the time being - an end to the current policy.

"I think it's important to recognise that inflation is where the Fed wants to be," said Dana Johnson, chief economist at US financial services company Comerica.

"They don't want to overshoot. I think they will pause real soon."

[economist-student]

What matters is relative prices, that is the difference between inputs and output. Inflation is always a monetary phenomenon. How come if inflation is "given", we had astounding economy growth during the 19th century while experiencing price deflation?

BTW, Zimbabwe is a third world country, how come they have hyperinflation??

Monetary inflation, that is the increase in the money supply, is inherently immoral. Not all people get the money at the same time, the financial system gets it first buying goods at today's prices while the last fool gets the money at next week's prices.

Even Mr. Alan "Bubble" Greenspan has said it so:

"Capital gains do not add to GDP. The higher prices of plant and equipment and homes are reflected in an economy's cost structure, which directly or indirectly increases prices of goods and services, leaving real output largely unaffected. Capital gains, of course, cannot supply any of the saving required to finance gross domestic investment."

[Alia]

Cool. You and I are on the same page on a number of issues.

BUT! If, indeed, monetary inflation is, in the classic dichotomy, "neutral", it cannot therefore be "inherently immoral". Hyperinflation is the result of trying to appease a population or destroy an economy long after the problem was first detected.

In re real prices - inputs and outputs remain constant REGARDLESS of what goes on with nominal. As Friedman and Phelps pointed out -- it evens itself out. Some management is required to stabilize inflation and unemployment; but overreaction to perceived or antipcated or expected inflation is what causes the inflation/unemployment pendulum to swing into large arcs.

[bpjam]

Employment is ONE of the factors that affects real estate markets. And it is a different level of importance in each market. And the fact that houses are taking longer to sell but prices aren't going down is indicative that there was no bubble to burst. And also indicative that you do not have a high level of investor/speculator purchases in Northern Virginia (unlike the D.C. market, for instance). Real estate markets are like politics - its all local until you can create one big overwhelming trend that can nationalize it (ie, interest rates, stock market stagnation, capital gains tax reductions,etc).

But that you can sell your house at all and prices are noticeably higher than 5 years ago, you can give credit directly to Newt Gingrich for creating the capital gains tax exemption for homeowners. It freed up $1T in real estate and created the boom we saw this past decade.

[economist-student]

Monetary inflation is always immoral.

Why can't I do for myself some "monetary policy"?

The Fed, and all central banks for that matter, are legalized counterfeiters. If M3 increases 10%, prices are not going to increase 10% all across the board. Whoever gets the newly printed money first benefits from it. It doesn't matter if if it's 3% or 10% per year, inflation redistributes wealth.

The dollar and all currencies should be backed by gold.

Inflation cannot occur in a truly free market economy.

[familyop]

"BTW, Zimbabwe is a third world country, how come they have hyperinflation??"

I like to give that question a Forest Gump kind of answer. It's because there is an enormous amount of money and few goods to buy with it. ...a macro-macro-economics answer for you. ;-)

And yes, macro- instructors teach that inflation is caused by near-full employment and more buying power. But Zimbabwe is suffering from a forced decrease in production.

[PghBaldy]

Yes. I just don't trust hedonics (or however it's spelled), and the inflation I've seen has been amazing since 2000. To be fair, some things were insanely cheap, still are, thanks to China's #1 export: deflation. Commodities though have been saying something for the past few years (which China imports)...

[Alia]

I appreciate your thoughts, and I do enjoy the subject matter very much.

I beg to differ with you.

Inflation cannot occur in a truly free market economy

Not true. It would be re-invented.

Have you read Ayn Rand's book Atlas Shrugged? The theory goes that in a truly free market, live is rugged, but all mankind roams free. Not true. People will band together to form a community. Once that community grows, rules and a central government get formed. And so on. I learned a great deal about the reality of free-market economics from pals who escaped to the commune lifestyles many years ago.

They became, over time, what they alleged they had left.

The Fed, and all central banks for that matter, are legalized counterfeiters

That certainly is a bold and assertive statement. If we all agreed to trade in elephants, assuredly that would make our government and its people "counterfeiters" as well. Fiat monies are created for very good reasons. Primitive cultures used shells or beads as currency. That's counterfeit, too.

What you are referring to the, is a real good for a real good.

Pretty rough to transport 500 oranges from your backyard in exchange for a ship.

Moving away from the gold standard was problematic.

And yes, I do agree with you that inflation is a "hidden" tax. Cut out social spending, and there will be no hidden tax. Get rid of a government and there will be tax. But will there be a civilization? No.

[TheLion]

Just read today that builders will have to build 40,000 new homes a year to keep up with the demand in Northern Virginia for the next 5 years....something never done before.

[bpjam]

Thats interesting news. Most the fastest growing markets are decreasing the sales of new homes. If the demand is still there, its probably a good place to invest still.