Sunday, November 06, 2005

The Fed Is Wrong

Each month since September 1994, we at Creighton University have conducted a survey of over 800 businesses in 12 states ( The results from the October survey provided some very interesting insights. First, economic activity continues to expand, but at a somewhat slower pace. Second, confidence among survey participants regarding economic activity 6 months out declined to its lowest level since the 2001 recession. Third, survey participants indicated that price pressures for raw materials and supplies remain excessive.

Supply disruptions from hurricanes in the Gulf, a jump in energy costs and rising short-term interest rates have certainly played a major role in the decline in confidence among supply managers and business leaders among the states. The prices paid index for the region was 84.3, relatively unchanged from September's reading of 85.9 but indicating significant inflation at the commodity and wholesale level. Because most inflation gauges for wholesale prices, such as the prices-paid index, show mounting inflationary pressures, the Federal Reserve Open Market Committee (FOMC) raised interest rates at its meeting on November 1st. That increase marked the 12th time since June of last year that the FOMC has increased short-term rates. I expect the FOMC to raise the funds rate at its December 13th meeting. As I have stated in previous releases, I am concerned that the Fed is overreacting to the sharp upturn in energy prices.

The evidence that higher energy prices have spilled over into other non-energy related prices and retail prices is scant. However, the continued increase in the short-term interest rates will curtail growth in the nine-state region and the U.S. in the months ahead. When the Bureau of Labor Statistics releases its consumer price index on December 15, I expect the inflation rate, excluding energy and food (the core rate), to show little inflationary pressures and provide a basis for questioning the Fed’s recent rate hikes. Fed policy needs to more properly account for global competition, productivity growth and technology which continue to restrain inflation below the Fed's projections.


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