Thursday, June 01, 2006

Another Fed Rate Hike?

Our regional prices-paid index and the national prices-paid index, both released this morning, show that inflation at the wholesale level is higher than what the Federal Reserve Open Market Committee is comfortable with. As the Fed Chairman has stated, "Future moves will be data dependent." The data to watch over the next month are, tomorrow's employment report, the CPI released the middle of June, and the daily yield on 10-year U.S. Treasuries.


At this time, most all data point to another rate hike at the end of June. If the U.S. Bureau of Labor Statistics, in their press release tomorrow, shows that U.S. economy added more than 200,000 jobs in May, I place the likelihood of a rate increase by the Fed at their June 29/29 meetings above 95 percent.

Is this a mistake? In a rate tightening regime, the Fed normally overdoes it by raising rates too long and too high as they did in May 2000 when they increased rates only to see the economy go into a recession 9 months later. I fully expect current rate hiking to restrain growth below levels acceptable to U.S. citizens and businesses. However, the Fed's number one responsibility is price stability--not low rates of unemployment. My bet is, they will overdo it.


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