Mishkin appears in opposition to Plosser’s comments regarding inflation. Mishkin says paying attention to headline inflation versus core inflation could result in “bad outcomes”. These comments are in contrast to Plosser’s speech last week in which he urged more attention to headline inflation.
Speaking in Philadelphia this morning, Philly FED president Charles Plosser says:
* The current “very accommodative” Fed policy will need to be reversed, “sooner than later”
* Tame Core inflation will not keep inflation expectations in check
* FED will have to back up words with action
*Monetary Policy should take headline inflation into account, as the public’s expectations influenced by persistently high headline inflation numbers
* Real fed funds rate -1% to -2%
* 2008: slow economic pace, 4% headline inflation
* 2008 unemployment is likely to get worse before it gets better
* Expect to see 2009 growth nearer to long-term trend
San Francisco FED president Janet Yellen, speaking in Portland, Ore., today, delivers a near-carbon copy of a speech given Monday in San Diego. It includes:
* 3 major risks: housing slump, financial market turmoil/credit crunch, and commodity prices
* Still much uncertainty about the valuation of complex, non-transparent financial instruments; still “hitches” in price discovery process
* Less leveraging and higher costs of credit ahead. Market functioning could worsen before it improves, especially if house prices fall further, reducing household wealth and therefore dragging down spending and engendering an adverse feedback loop.
* In commodities, neither supply nor demand adjusts quickly. Inventories seem to be declining. If prices reflect fundamentals, “situation is not likely to turn around any time soon”
* Overall, only modest growth in H2, and core inflation could run “modestly higher.” For monetary policy, “readiness is all” — FED will be on top of developments and act as needed to fulfill mandate of price stability and sustainable growth
Lacker addressed the notion of the Primary Dealer Credit Facility saying that he does not think the market would be thrown into turmoil if the facility were removed and he noted the FED is seeing how the markets develop before extending the PDCF.
Lacker sees some scope for importing inflation due to the weak dollar and also notes that energy prices have the potential to bleed into Core Inflation but says that osmosis depends on consumer expectations. He. like other FED members, sees rising food and energy prices as being driven by fundamental demand.
On rates, Lacker says that the FED has to be prepared to raise rates, even in the face of higher unemployment and weak growth.
Richmond FED president Lacker said in a speech at Washington today:
• “Inflation outlook has deteriorated,” FED must remain vigilant
• Tepid US growth expected to accelerate next year
• Diminished downside growth risks
• Inflation expectations must be controlled — forcefully if necessary
• Monetary policy stimulus to be removed as conditions improve
• Housing recovery to be slow and painful
FED chairman Ben Bernanke is speaking at an FDIC mortgage lending forum this morning. He says:
* New mortgage lending rules will be floated next week
* Short-term funding markets remain strained but continue to show improvement from March
* The FED is closely monitoring developments in financial markets and considering several options, including extending primary dealer lending beyond the end of this year “should the current unusual and exigent circumstances continue to prevail.”
* The FED’s decision to lend to primary dealers could “tend to make market discipline less effective in the future.” At the same time, reforms in the oversight of these firms must take into account the distinctive features of i-banking and avoid inhibiting efficiency and innovation.
* Dealers must demonstrate capability to manage failure of a major counterparty
* Welcomes efforts to improve regulation of Fannie and Freddie — they should be “strong, well-regulated, well-capitalized, and focused on their mission”
San Francisco FED president Janet Yellen, speaking in San Diego today, provides a gloomy outlook for the US economy:
* 3 major risks: housing slump, financial market turmoil/credit crunch, and commodity prices
* Consumer spending is at its slowest pace since the ‘01 recession, and business fixed investment has stalled. House prices and construction spending will continue to fall well into next year (price-rent ratio still out of whack, inventories elevated, Case-Shiller futures point to 15-20% decline in H2)
* Still much uncertainty about the valuation of complex, non-transparent financial instruments; still “hitches” in price discovery process
* Less leveraging and higher costs of credit ahead. Market functioning could worsen before it improves, especially if house prices fall further, reducing household wealth and therefore dragging down spending and engendering an adverse feedback loop.
* In commodities, neither supply nor demand adjusts quickly. Inventories seem to be declining. “It should be harder to speculate and take positions on commodities that are not easy to trade on futures markets and are not included in index funds”… but prices of such commodities have risen just as fast as those that are. If prices reflect fundamentals, “situation is not likely to turn around any time soon”
* Overall, only modest growth in H2, and core inflation could run “modestly higher.” For monetary policy, “readiness is all” — FED will be on top of developments and act as needed to fulfill mandate of price stability and sustainable growth
Yellen goes further than her FED counterparts to say bank’s originate-to-distribute model was loaded with conflicts of interest and moral hazard problems.
She also joins the chorus of the Chicago FED’s Evans and St. Louis FED’s Bullard in saying the real fed funds rate is zero or negative.
FED Governor Mishkin, speaking in Israel, dishes out some stiff warnings and hard realities:
* Current financial crisis one of the worst since the Great Depression; credit conditions could deteriorate further if the economic outlook declines.
* Necessary to keep both inflation and inflation expectations low — “vigilance”
* Increased mortgage delinquencies and foreclosures will keep housing prices low — an adverse feedback loop is present (first such mention by a FED official)
* Bright side: little evidence of wage-price spiral
* Declining housing prices and rising energy prices are keeping risks to growth on the downside. Substantial headwinds still exist in the US, as well as in Europe
At the moment, next week’s FED-speak is limited to the following:
Tuesday
Atlanta FED president Lockhart @ DC overnight re: “Economic Slowdown, Market Fallout and the Path to Financial Recovery”
Wednesday
FED governor Frederic Mishkin @ Israel @ 12:00pm EDT re: “The Global Financial Disruption and the World Economy”