3 Reasons Why the Fed Can Afford to Pause in June

Tuesday morning, Federal Reserve Vice Chairman Kohn made the most explicit comment that we have heard from a central bank official to date about pausing in June. He said that the “economy, markets should gradually improve” and “monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term.”

The Federal Reserve needs to pause because inflation is on the rise, and they can afford to pause because economic data been stabilizing.

Tuesday morning, oil prices hit a new intraday high of $129 barrel, which tells us that inflation will continue to increase.

1. What’s Going on with Producer Prices?
In the month of April, headline producer prices fell short of expectations while core prices rose more than expected. This reversal of patterns is fascinating because the primary driver of higher inflation has been food and energy prices. It isn’t a surprise to see core rise, because prices are being increased everywhere, but I believe that the slower growth in headline prices should be nothing more than a correction within an overall uptrend. The US government has already increased their predictions for food price growth by half of a percentage point and the latest uptick in oil prices will only further increase inflationary pressures.

2. Economic Data Has Been Stabilizing
1. Leading indicators Rose for the Second Month in a Row
2. Housing Starts and Buidling Permits Rebounded in April
3. Manufacturing in the Philadelphia Region is Recovering
4. Service Sector ISM Back in Expansionary Territory
5. Trade Deficit Narrowed in March

3. TED Spread
The spread between what the U.S. government and banks pay to borrow in dollars for three months also dropped to the lowest level in 9 months. This suggests that liquidity problems are easing.

There are still many causes for concern, but for the time being, the Federal Reserve can afford to wait and that will be bullish for the US dollar.

Fed Fund Futures Pricing in a Rate Hike?!
The latest Fed Fund Futures are already pricing in an 86 percent chance that the Fed will leave interest rates at 2 percent on June 25th. The probabilities are the same for rates remaining unchanged in August and September. In fact, the markets are actually pricing in a TINY chance of a rate hike near the end of the year.

Comments

[Jason Rines...:]

Will the financial system beat the race against time to restore balance sheets before the U.S. consumer is tapped out and further decreases non-essential spending? Can banks survive the residential and commercial real-estate defaults still reaching it's peak? Right now this is a bear rally to me based on some shrewd maneuvers and stimulus by the FED.

Let's see also who sits in the White House and what energy policy and government style America decides on. I agree energy bull run will continue but should run out of steam in July and we'll get some easing there. Wall St. cannot live without Main St. and cheap money only will get Wall St. so far. Bear in mind, the majority of the U.S. economy is now small business. I like your articles, please keep them coming.

2008 May 20 07:41 PM

[sedek:]

Good piece, but I would suggest that the political factor be watched on the Dollar and expect a 25-50bp hike from Gentle Ben before the elections in an effort to deflate oil and bring gas prices down to $3.00. This should take the Dollar to about $1.45/Euro, maybe $1.50, as probably $20 of oil is now speculative premium driven by the bubble mentality, which is why oil has detached some from the dollar and is driving higher on no real news.

Good luck and I appreciate the information.

2008 May 20 09:39 PM

[Just Say Whoa!:]

"Based on the criteria in place a quarter century ago, today's U.S. unemployment rate is somewhere between 9% and 12%; the inflation rate is as high as 7% or even 10%; economics growth since the recession of 2001 has been mediocre, despite the surge in wealth and incomes of the superrich, and we are falling back into recession."
www.marketwatch.com/ne...

The "pause" question becomes irrelevant and superceded by a more important question:

"How much longer can the Republicans rig inflation/unemployment numbers to make inflation and unemployment rates appear artificially low?"

Using the non-rigged numbers, the EAU has a stronger economy, lower inflation and higher employment than the USA.

We have become a Third World country, thanks to the -R's!

2008 May 20 09:41 PM

[the final h...:]

and the d's promise to raise taxes...so exactly what is the prediction?

no matter who wins...expect the worst to happen...because it will

2008 May 21 10:38 AM