Fed Policymakers Are in a Tough Spot

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

The job market picture, in combination with the run-up in food and energy prices and the tightening in bank credit, has generated a poor outlook for consumer spending growth in the near term. Tax rebates are providing some support. In the last six weeks, Treasury has mailed out or directly deposited 66.6 million rebates, averaging $854 each. While the bulk of that will be saved or used to pay down debt, enough will be spent to keep consumer expenditures from tanking in the near term. Treasury will continue to distribute tax rebates over the next four weeks. After that, strains on household budgets will be a serious issue in the second half of the year. Job losses are expected to continue, adding to concerns about spending growth in the months ahead.

Fed policymakers are in a tough spot. Import prices have risen more rapidly. Inflation pressures are working through the system, showing up more forcefully at the wholesale level. However, credit conditions are far from normal. The more rapid decline in home prices is likely to deepen and prolong the housing market correction. The poor consumer spending outlook should make it tough to raise prices and the labor market is not generating any appreciable inflation pressure.

Inflation expectations have risen, but there’s little ability of consumers to act upon those expectations (that is, to demand higher wage increases) in the near term.

Comments

[Whidbey]

You may be looking in the wrong direction. Housing and banks matter, but the real inflation will come from Congress which will spend all it can over the near term future (four years?). Stimulus? It will be compounded by increased consumer and business taxes which will lessen employment progressively. Let's see, fiscal inflation and fiscal unemployment. That is the the misery index. Today I think the MI is 4% plus 5.5% or 9.5%. I think the MI can double every two years. The fed has a problem, but its Congress.