Fed's Vote On Rates: Not Even Close

by: David Andrew Taylor
"Close call" on rates?

That was the term being used by the Federal Reserve in their minutes of the meeting. Lacker, from Richmond, actually voted for an additional raise.

I got this from a Wall Street Journal article that quoted a Goldman Sachs economist:

The minutes reveal less dissension with the decision to pause rates at 5.25% than we had expected. … Richmond Fed President Lacker wanted to hike based on his view that the acceleration in core inflation was broad based, and also expressed concern about the upward revision to unit labor cost growth in the latest GDP data. … So the bias of the committee remains towards tightening, though the risks of additional hikes appear low given the sentiment expressed here and our view (shared with the Fed, apparently) that growth will remain below trend for some time.
-- Goldman Sachs Economic Research

I'm going to have to second that as I wasn't sure where the dissension line was going to be drawn. I actually felt that there may be more haggling than just one dissenter. With that, there's probably less likelihood of a rate increase going forward. There were 10 voters, of which nine said no raise. Further inflation data will likely solidify this stance.

Where to now for the dollar?
Great question.... glad you asked. It all depends on two things.


See, Bernanke is an inflation targeter. He'll want to see core inflation move in a contained 2% range. Some think he's weak on inflation. I don't see it.. neither did Mark Thoma with an excerpt from a speech from Bernanke himself:

...a crucial proviso is that, in conducting stabilization policy, the central bank must also maintain a strong commitment to keeping inflation--and, hence, public expectations of inflation--firmly under control.

As long as inflation is higher, or higher than where it is right now, there will be cause for concern from the Federal Reserve. If they start to see containment in inflation, then their secondary concerns will kick in: Growth and employment. That will likely warrant a move towards policy accommodation:
Read lower rates and a lower dollar.

Inflation elsewhere:
Let's say that inflation starts to contain itself overseas or cross borders. We've seen the inflation numbers from Japan and Canada. Canada barely has a whisper of it compared to some of its trade partners. One of the benefits of a high currency valuation. Then there is Europe where two things are beginning to occur: Inflation is rising and the ECB is starting to do something about it. The ECB are some of the most notorious inflation targeters out there. But, they seem to be a little behind the 8-ball. They haven't been as quick to raise rates, nor as aggressive. If this type of policy would prevail, then I fear there would be a confidence issue with the euro. no worries.... wouldn't be the first time. If, however, they kick it up a notch and move a little faster at raising rates, the declining rate differential would likely attract less investment from overseas and the dollar would depreciate as there is more money flowing out in the form of goods and services. But, I'm more inclined to believe that the ECB will look a little shaky or behind in their rate increases. Also, the U.S.'s policies may very well stabilize world inflation and thereby forestall any need for the ECB to raise rates further.