Thursday, June 02, 2005

The 8th Inning?

New Dallas Fed President Richard Fisher had an interesting comment yesterday when he said that the Fed is in the "8th inning" of raising rates suggesting that only one or two more hikes would be on the horizon.

Fisher, who joined the Dallas Fed in April, told CNBC-TV and the Wall Street Journal in separate interviews that the Fed was in the eighth inning of monetary tightening.

Using a baseball analogy, Fisher implied the Fed was getting ready to pause, provided inflation stayed tame.

"We've gone through eight innings here, 25 basis points an inning," Fisher told the Journal, referring to the eight quarter-percentage point rate hikes made by the Fed since it began hiking borrowing costs this time last year.

"The next meeting in June is the ninth inning. We'll take a look after that. We may have to go into extra innings in this contest against inflation," he said.

I wouldn't read too much into this as I think he's wrong. First, he's brand new at the Fed and has just joined the FOMC as a voting member so I am not confident that he knows the folks very well. Second, he's a bit of a politician wannabe (ran against Kay Bailey Hutchison for Senator twice) and according to this (certainly not impartial) profile a bit more of a politician than your normal Fed President. Third, his bio reads like he's a dove.

The market is pricing in another 100 basis points of tightening from now until December. (Dec ED futures at trading at 4.00%) There's nothing in any data that suggests the expansion is in jeopardy and hence the Fed has no reason not to tighten especially since they view current policy as accommodative. Fed comment on the last rate hike:

"The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability."

Finally, a reason to tighten that is rarely mentioned overtly: the Fed hasn't fully reloaded its monetary guns; i.e., gotten rates to a level where when the economy slows its has enough room to cut meaningfully.

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