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Here's an interesting excerpt from this week's Market Watch column in
Barron's. I suppose I found it interesting because while I see the
market beginning to discount fed funds rate increases, I see no evidence
that the inflation genie is even close to being stuffed back in the
bottle.
Earl
Sinai's Market Perspectives
1 World Trade Center, New York, N.Y. 10048
May 25 ~ Now that price and wage inflation can be seen as rising in the
actual data, rather than just a potential prospect, the 50-basis-point
hike in the federal-funds and related short-term interest rates
signifies greater urgency for the Fed in slowing the boom and setting
fundamentals in place that will eventually produce lower inflation.
What the inflation data are indicating, looked at over a long time
period, not just point-by-point pieces of data, is upward momentum to
inflation, lately not just a crawl upward but a noticeable pickup.
Central bankers typically believe that inflation, once having started to
accelerate, generally will continue to do so for quite some time, and
that the process is hard to reverse. A significantly weaker economy from
the demand-side and increased slack in labor and product markets always
have been necessary ingredients in turning the inflation process around,
with Fed actions designed to accomplish this generally extending over a
long period of time.
Unlike 1994-95, where no acceleration of inflation was seen at any time,
even though the Federal Reserve raised short-term interest rates a total
of three percentage points, this time the data showed that inflation has
picked up in actuality. Anecdotal evidence on rising prices and wages is
ample. And surveys of businesspeople indicate that pricing power has
appeared. For all of the 1990s, businesses uniformly reported no ability
at all in raising prices. One must go back to the business-cycle episode
of 1986-89 to find the last time a systematic acceleration of inflation
occurred.
Thus, the backdrop for the Federal Reserve going forward is one of
rising actual inflation in the face of a booming economy and an
extremely tight labor market. Demand-pull and cost-push sources of
higher inflation seem to be predominating over the deflationary thrust
associated with the Internet, technological change and strong
productivity growth.
Given this situation, the 50-basis-point hike in the federal-funds rate
by the Federal Reserve cannot be judged to be its last notch of
tightening, especially since the dosage was stepped up in the face of
little tangible evidence that the previous 1 1/4 -point cumulative
increases since last June are biting on the economy. Certainly they are
not [biting] on inflation, which shows up now as rising, with the
fundamentals of inflation generally still pointing to higher inflation.
-ALLEN SINAI
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