There is a group of people who are very important to the national economy that speak often but never receive adequate press coverage. There people are the various heads of regional Federal Reserve Banks. Over that last month, their message has been consistent: they are concerned about inflationary pressures in the economy.
Atlanta Federal Reserve President Jack Guynn on October 3:
“I consider inflation risks to be elevated at the moment, he said. “I think one has to give considerable weight to the fact that not only in some of the headline measures, but in some of these core measures, we may see the pass-through of at least some of the energy cost increases.”
Federal Reserve Bank of Kansas City President Thomas Hoenig on September 26:
Hoenig noted that the consumer price index has already pushed up significantly from a year ago, thanks to high energy prices, while unit labor costs were rising and economic capacity was being absorbed by the strong U.S. economy.
“When you see all three coming together you must be alert,” he said. “The mission of the Fed is to be sensitive to these pressures.
San Francisco Federal Reserve President Janet Yellen on September 27:
She said higher energy prices “put U.S. monetary policy on the horns of a dilemma” as policymakers balance possible passthrough of prices to core inflation against potential long-lasting cuts in consumer spending if high prices persist.
“Estimates of the extent of spending are escalating, and the recovery and bounce-back, fueled by massive fiscal stimulus, could propel the U.S. economy on an unsustainable upward trajectory,”
Chicago Feder Reserve President Michael Moskow on September 26:
Michael Moskow said there may still be excess capacity in the nation’s economy but that inflation is running at the upper end of the Fed’s comfort zone – a position he’s offered in other recent speeches.
First, let me offer some explanations. The Fed’s policy is accommodative when they was the economy to expand. This means lowering interest rates to a low-enough point to stimulate borrowing. The Fed’s policy is neutral when they feel rate levels are low enough to stimulate economic growth through borrowing and high enough to prevent inflation from increasing. The Fed’s policy is restrictive when rates are high enough to prevent economic growth and inflation. There is no empirical formula to derive these levels. It is largely based on the personal perception of various members of the Federal Reserve.
So, what are they worried about? First there is the increased cost of energy. That is concern enough. However, there are indications at other levels of the economy that inflationary pressures are increasing. Each month, various Federal Reserve regions issue a regional manufacturing report that is broken down into various sub-categories. The price categories of these reports have all shown a recent sharp increase in prices. The Empire State Index’s recent prices component increased by 20 points. The most recent Richmond Federal Reserve Survey showed an increase in the projected prices paid for future manufacturing inputs. The most recent Philadelphia Manufacturing Survey also showed a sharp increase in prices paid by manufacturers.
Several non-Federal Reserve Manufacturing reports have also showed a similar increase in prices. The recent National Association of Purchasing Managers Index showed a 14 point increase in its most recent survey. The latest ISM Manufacturing survey showed a sharp uptick in prices as well.
All of the above indicators occur in the economic chain before the consumer price index; they occur in the production of goods the consumer buys. As a result, these price increases may not have passed onto the consumer yet. However, it is only a matter of time. As a result, expect more Fed rate hikes.
