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1. Inflation Slips, Still Above Fed's Comfort Zone
2. Fed's Moskow: Inflation Too High
3. Fed Says Inflation 'Greatest Concern'
4. Industrial Output Rises, but Smaller Than Expected
1. Inflation Slips, Still Above Fed's Comfort Zone
Consumer inflation edged down in October, skewed by tumbling energy prices.
However, inflation still remains above the Fed's stated comfort zone.
The Consumer Price Index (CPI) dropped a more-than-expected 0.5 percent,
according to the Labor Department. Economists had been looking for prices to
fall by 0.3 percent, according to a Reuters poll.
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Energy prices fell 7 percent for the month. Year to date, energy prices are down
a seasonally adjusted annual rate of 1.5 percent, according to the government.
In comparison, energy prices rose 17.1 percent in 2005.
Excluding food and energy costs, core inflation inched up 0.1 percent to an
annualized pace of 2.7 percent. That's still well above the Fed's comfort range
of 1 percent to 2 percent for core inflation. Analysts were looking for a 0.2
percent gain, according to Reuters.
"This will be comforting for the Fed, but they'll need more than one month's
data," Steven Whiting, senior economist at Citigroup, said to Reuters.
The Fed has left interest rates unchanged for its past three meetings following
17 consecutive increases. The Fed is hoping that the 17 rate increases will work
to slow inflation without hurting the economy.
"It's more evidence that inflation is cooling and that the tightening process
that the Fed started over two years ago has started to have an impact on the
economy," Rick Klingman, head trader at ABN AMRO's U.S. Treasury desk, tells
Reuters.
"We have seen evidence that the economy is softening and with that softening we
are seeing a cooling in inflation as well," he added.
The Fed meets again on Dec. 12. According to the AP, economists are predicting
the Fed will again hold rates steady. Other analysts say the Fed could possibly
cut rates next year if inflation softens again.
Editor's Note:
2. Fed's Moskow: Inflation Too High
Chicago Federal Reserve President Michael Moskow restated that he believes
inflation is still running too high and the Fed may need to raise interest
rates.
"The risk of inflation remaining too high is greater than the risk of growth
being too low," Moskow told a Chicago business group. Moskow prepared the
remarks before the release of today's CPI report.
"As reflected in the minutes of the October meeting, all Federal Open Market
Committee members agreed that inflation risks remained the dominant concern," he
said.
"Thus, some additional firming of policy may yet be necessary to bring inflation
back to a range consistent with price stability in a reasonable period of time,"
he added.
Moskow said that the Fed's decision to hold rates steady for the past three
meetings gives them time to assess the current inflation environment to see if
further rate moves are necessary.
"Nonetheless, we have to be vigilant in monitoring these [inflation]
expectations. If they did increase, it would be incumbent on the Federal Reserve
to adjust policy to affirm our commitment to price stability," he said.
Moskow will be a voting member of the Federal Open Market Committee, the body
that sets interest rates, next year.
Editor's Note:
3. Fed Says Inflation 'Greatest Concern'
Federal Reserve officials worried last month that inflation might not recede as
hoped and an inflationary psychology could set in, making their job tougher,
according to meeting minutes released Wednesday.
"All members agreed that the risks to achieving the anticipated reduction in
inflation remained of greatest concern," minutes of the Fed's policy-setting
Federal Open Market Committee Oct. 24-25 meeting said.
"Members noted that a significant amount of data would be published before the
next committee meeting in December, giving the committee ample scope to refine
its assessment of the economic outlook before judging whether any additional
firming was needed to address those risks," the minutes said.
Fed participants expressed concern that inflation expectations could drift
upward if core inflation — as measured when volatile fuel and energy costs are
stripped out — remain elevated for a protracted period.
The Fed in October kept its benchmark overnight federal funds rate steady at
5.25 percent for the third meeting in a row, predicting that moderating economic
growth would likely ease consumer price pressures.
Message "Hawkish"
The minutes conveyed Fed concerns about the outlook for inflation, but
expectations that core inflation would edge lower as economic growth slows,
although it noted that there were dangers that price rises could fail to ease.
"All participants emphasized that the risks around the desired downward path to
inflation remained to the upside," the minutes said.
Prospects for Federal Reserve interest rate policy to remain on hold for several
more months were solidified by Wednesday's minutes.
Futures prices show the Fed will hold policy steady through January as chances
of a cut in the federal funds rate in March to 5 percent from the current 5.25
percent were last at 14 percent, down from as high as 40 percent on Tuesday.
After the minutes release, U.S. Treasury debt prices extended losses while Wall
Street stock prices pared gains but stayed in positive territory, and the dollar
edged higher.
"The main message was a little bit of a hawkish one. They wanted to remind that
they still have a bias toward raising rates if inflation remains as high as it
has been over the past 12 months," said John Miller, head of fund management at
Nuveen Investments in Chicago.
Fed officials were confident that the economy would expand at a rate close to or
a little below its long-run potential and that any drag from the slowdown in
housing activity would gradually wane.
The slowdown in the housing market and declines in house price gains was not
translating to a slowdown in consumer spending to date, the Fed said.
"Many participants drew some comfort from the most recent data, which suggested
that the correction in the housing market was likely to be no more severe than
they had previously expected and that the risk of an even larger contraction in
this sector had ebbed," the minutes reported.
Tight Labor Market
But many participants expressed concerns that any significant home price
declines could have a more pronounced impact on consumer and other spending.
While the labor market remained tight, it was unclear from data whether wages
were rising as a result, according to the minutes. But members saw high profit
margins as providing some scope for businesses to absorb increased labor costs
without passing them on to consumers in the form of higher prices.
Policy-makers also discussed the merits of inflation targeting at their meeting
but felt the issue merited more deliberation, the minutes showed.
"The possible specification of a numerical price objective raised a number of
complex and interrelated issues that required considerable further discussion,"
reported the minutes. Participants agreed to continue their review of
communication issues at the FOMC's January meeting.
Fed Chairman Ben Bernanke believes adopting an explicit target would help the
U.S. central bank anchor inflation expectations. But some other Fed
policy-makers have voiced concern that it might also deny them important policy
flexibility.
Democrats, who retook control of Congress in the Nov. 7 elections for the first
time in 12 years, have also expressed worry that any target may be bad news for
job growth.
Congress has given the Fed a dual mandate to seek both price stability and full
employment.
© 2006 Reuters.
Editor's Note:
4. Industrial Output Rises, but Smaller Than Expected
Output at U.S. factories, mines, and utilities rose a smaller-than-expected 0.2
percent in October, driven by a sharp rebound in utility output and an increase
in mining output, a Federal Reserve report said Thursday.
Analysts polled by Reuters had predicted a 0.3 percent advance following an
unrevised drop of 0.6 percent in September. Figures are seasonally adjusted.
Output of the manufacturing sector fell 0.2 percent in October but rose 0.1
percent when motor vehicles and parts are excluded, the Fed noted in its monthly
report.
Motor vehicles and parts production was down 3.9 percent in October after a
1.9 percent decline in September. Motor vehicles and parts output was down
10.4 percent in October from a year ago.
Overall industrial output was up 4.9 percent in October compared to the same
period a year ago.
Utility output jumped 4.1 percent in October, nearly offsetting a 4.6 percent
decline the prior month. Mining production grew 0.6 percent in October after a
0.4 percent advance in September.
Combined capacity utilization of factories, mines, and utilities in October was
82.2 percent, up from a revised 82.1 percent in September. Economists polled
by Reuters had predicted 82.0 percent in October.
Manufacturing capacity use fell to 80.7 percent in October from 81.0 percent in
September.
Capacity use at utilities was 88.2 percent, up from 84.8 percent the prior
month. Capacity use of mines remained extremely high in October, at 91.8
percent, up from 91.1 percent the prior month.
© 2006 Reuters.
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