John M. Berry - Analyst information agency "Bloomberg News"
Chairman of U.S. Federal Reserve Alan Greenspan removed any ambiguity about how the Central Bank intends to move in the matter lifting interest rates to remove some of the incentives of monetary policy that will strengthen American economic growth.
June 15, in his speech related to his claim for the fifth four-year term as chairman, Greenspan told the U.S. Senate Banking Committee that "inflationary pressures are unlikely to cause serious concern in the coming period of time."
This observation definitively clarified if it was not already clear before, that the Fed will raise its key interest rate by 25 basis points at the meeting of 29-30 June, and that Greenspan is currently intends to continue to move in the "moderate" pace in the matter increases in interest rates.
Last week the other comments the Head of the Federal Reserve and many other high-ranking officials of the Central Bank is widely interpreted by some analysts as an indication of "policy-meykerov" that they were sufficiently concerned about inflation and that "moderate" policy may have to give way to the "aggressive" in the increase of rates.
Sending a signal
Once the markets have received this message on 15 June, yield on all Treasury coupon securities fell almost 18 basis points, reducing the increase that occurred during the previous week.
Part of the fall of profitability, of course, also occurred because of the relatively soft report on consumer prices for May. The report came out, largely in line with expectations, although after a few more concerns increases the consumer price index, was the feeling of relief that all the same data are consistent with expectations.
There are so many high-ranking officials of the Federal Reserve estimated the need to lift interest rates, as no other initial increase in interest rates, the Central Bank was not so well marked. Some officials even praised the market for the correct perception of the signal, which was sent to officials.
Market reaction was interesting because Greenspan actually gave a kind of warning, which caused distress to investors last week: "If our assumption about how the economy is going to evolve, and how inflation will prove wrong, then we will change its policy, he said.
Greenspan wants to move slowly
In other words, solutions that are members of the Federal Open Market Committee (FOMC) will be at the meeting in August, September, November and December will depend on economic data. It would be preferable, according to the Head of the Central Bank, to move relatively slowly, perhaps with subsequent increase of 25 basis points in two or three of these meetings.
Some of the other FOMC members may well want to see the increase at each meeting. But this seems unlikely, especially if the economy and inflation will follow the rate expected by Alan Greenspan.
Fed officials, including the chairman, was surprised by how quickly the inflation picture has changed this year. A key question is - will be a weakening labor market and productivity to limit the recent rise in the prices of some goods and services.
Not all FOMC members shared this interpretation of the inflationary process in the U.S., although some of the few in the same puzzled actual behavior of inflation this year.
Payments to employees
One important question - whether the increase in payments to workers in the first quarter of this year, a harbinger of that situation should change for the better. Greenspan himself said that he expects the payments will increase, especially given the fact that the strong growth of productivity has an unusually high returns.
Maybe that part of the increase in payments in the first quarter were not a result of the fact that employers had to pay more to hire workers that they need, or to retain those already working. Most of the higher payments occur in the form of increased compensation costs, including some very high bonuses to certain major corporate pension plans.
If so, there may be less meaningful progress with respect to unit labor cost than the first quarter figures.
The model of price increases
Version Greenspan on the process of inflation can be described as "a model of price increases." This means that companies set prices, in fact, going on the road to higher prices, in proportion to their costs, including labor costs. If productivity growth to compensate for higher wages and costs, there is no pressure to raise prices.
In his speech, June 15, Greenspan said, "a problem that will concern us most - that the slowdown in the extraordinary pace of productivity, because the average hourly wage has increased."
Regarding this point, the core of the consumer price index rose by 1.7% over the past 12 months - an increase which is almost all, if not absolutely all, FOMC members very satisfied. This includes even such as the president of the Federal Reserve Bank of Kansas City, Thomas M. Hoeniga, who has a reputation as man with a rather "yastrebinoe 'attitude towards inflation.
Last week at the roundtable in Denver, Hoenig said the press clearly, "I'm not concerned about inflation around 1.8%. It was a 12-month change in core consumer price index for April.
Now everyone, including policy-meykerov, will wait to see how events develop.
bloomberg.com
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