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Elevated inflation expectations are unacceptable to a mainstream Central Banker, and Bernanke seems to be clearly telling us we’ve reached his limits.

To get ahead of the ‘inflation curve’ will mean interest rates of at least the 5.25% level of last August, when the FOMC didn’t cut because inflation was deemed too high.

While GDP growth is lower now, inflation is a lot higher now. And while GDP was higher then, their forecast for growth had been deteriorating through year end, and now it’s both above expectations and improving.

“The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations,” Bernanke said in remarks prepared for delivery to a conference organized by the Boston Federal Reserve in Chatham, Mass.

“The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation,” Bernanke said.


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7 Responses

  1. Warren – Just to clarify my thinking, are you saying that you think the fed funds rate needs to be at least 5.25% to get ahead of the “inflation curve”, or that the Fed thinks so?

    And, if you think the fed funds rate needs to be back at 5.25% to get ahead of the inflation curve, why 5.25% and not some other level?

    Also, what would a 5.25% fed funds rate do to the housing sector with all the sub-prime adjustible rate mortgages that will reset this year and next?

    Ed Rombach

  2. Warren – Just to clarify my thinking, are you saying that you think the fed funds rate needs to be at least 5.25% to get ahead of the “inflation curve”, or that the Fed thinks so?

    I THINK THE FED THINKS SO- THAT’S WHERE THEY WERE IN AUGUST WHEN INFLATION AND INFLATION EXPECTATIONS WERE MUCH LOWER.

    And, if you think the

    FED THINKS THE

    fed funds rate needs to be back at 5.25% to get ahead of the inflation curve, why 5.25% and not some other level?

    JUST A BENCHMARK OF WHERE THEY WERE IN AUGUST WHEN THEY SAID INFLATION WAS TOO HIGH TO CUT.

    Also, what would a 5.25% fed funds rate do to the housing sector with all the sub-prime adjustible rate mortgages that will reset this year and next?

    NOT MUCH, AND MIGHT HELP IT. MOST RESETS ARE PAST, AND HOUSEHOLDS AND THE NON GOVT SECTORS ARE NET SAVERS, SO HIGHER RATES INCREASE PERSONAL AND OTHER INTEREST INCOME, THEREBY SUPPORTING SPENDING.

    Ed Rombach

  3. I’d be fine with FF at 5.25% as long as the long bond was at 7.25% or more.

    Just not sure how we’ll get there without an increase in wages.

  4. So, Warren, help me out here. I’m just a pedestrian.

    If you expect rates need to tick up from here, won’t that tank the S&P?

    When would you look for this to happen? After the election?

    Thanks,

    Rob K.

  5. Bernanke’s speech showed he recognized you can have inflation without wages driving it.

    Yes, higher rates are already causing the s and p to stumble. But curve will anticipate rates going up and then coming down, and the duration of stocks put them on that down slope.

  6. But curve will anticipate rates going up and then coming down, and the duration of stocks put them on that down slope.

    Warren what do you mean here? Duration of stocks?

  7. Stocks probably trade to maybe a 5 or 6 year duration, so the zero coupon rates for those maturities are the main discount rates for earnings.

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