Fed cut Monday or Tuesday
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Surge in labor costs means Fed may delay easing rates, economists say
Tuesday, August 07, 2007 11:00:00 AM
WASHINGTON (Thomson Financial) - New statistics showing a sharp rise in unit labor costs and less than a 1 pct increase in productivity over the last year means the Federal Open Market Committee is almost certain to keep rates where they are, maintaining its bias against the possibility of inflation, in its meeting today, economists here said.
The Labor Department has reported that the cost of hiring workers rose 2.1 pct in the second quarter after a 3.0 pct gain in the first quarter, leaving labor costs 4.5 pct higher than they were a year ago.
Several economists said that the increase, which is the fastest pace in more than six years, means the Fed is highly likely to maintain a bias against inflation.
'The close correlation between core inflation and labor costs suggests the former is now at risk of reversing some of its recent moderate progress,' said Sal Guatieri of BMO Capital Markets Economics. 'This wont sit well with a Fed that is preoccupied with keeping inflation low, and will discourage it from easing unless the turmoil in credit markets worsens and financial conditions tighten further.'
'This is no place for the Fed to pretend that inflation risks have gone away,' Robert Brusca of Fact and Opinion Economics agreed. 'Risks still lie on the side of greater inflation.'
Ian Shepherdson, chief US economist for High Frequency Economics, said the spike in labor costs are already high enough that inflation would likely be impacted if demand in the US were not so weak.
The FOMC is due to announce its latest decision on interest rates later this afternoon, after a meeting that started early this morning.
Tuesday, August 07, 2007 11:00:00 AM
WASHINGTON (Thomson Financial) - New statistics showing a sharp rise in unit labor costs and less than a 1 pct increase in productivity over the last year means the Federal Open Market Committee is almost certain to keep rates where they are, maintaining its bias against the possibility of inflation, in its meeting today, economists here said.
The Labor Department has reported that the cost of hiring workers rose 2.1 pct in the second quarter after a 3.0 pct gain in the first quarter, leaving labor costs 4.5 pct higher than they were a year ago.
Several economists said that the increase, which is the fastest pace in more than six years, means the Fed is highly likely to maintain a bias against inflation.
'The close correlation between core inflation and labor costs suggests the former is now at risk of reversing some of its recent moderate progress,' said Sal Guatieri of BMO Capital Markets Economics. 'This wont sit well with a Fed that is preoccupied with keeping inflation low, and will discourage it from easing unless the turmoil in credit markets worsens and financial conditions tighten further.'
'This is no place for the Fed to pretend that inflation risks have gone away,' Robert Brusca of Fact and Opinion Economics agreed. 'Risks still lie on the side of greater inflation.'
Ian Shepherdson, chief US economist for High Frequency Economics, said the spike in labor costs are already high enough that inflation would likely be impacted if demand in the US were not so weak.
The FOMC is due to announce its latest decision on interest rates later this afternoon, after a meeting that started early this morning.
You're so wrong and pathetic
Just 2 weeks ago market had it record highs, bonds were at 5.25 and oil was at record highs
Has inflation slowed in 2 weeks?
Or Fed should cut and rise every 2 weeks?
Or should it just give avay money for free who was not lucky at stock market?
Current deep in bonds yield happened just because people don't want to risk. When volatility calms bonds yields will grow to at least 5%
Inflation is still here
By the way yield curve is not inverted either
I don't really disagree about risk being repriced, but the Fed has to be concerned with the financial sector taking such a bath as a result of that risk being repriced virtually overnight. Like it or not, the Fed has a history of easing such adjustments with massive liquidity injections. They did it with the Asian financial crisis, they did it with LTCM, they did it belatedly with the S&L crisis, they did it for years after the tech bubble burst. There is an institutional memory of how they handled these various crises, and while we might object on theoretical terms and say they merely postponed the day of reckoning and thus made it worse, it has worked out pretty well in practice. If I'm Bernanke I'll take my chances with inflation if it means avoiding getting raked over the coals by congress for the shutdown of the crdit markets and destruction of the housing industry.
There is no way in hell the FED doesn't go to a more neutral stance in the language from what it said last meeting. It already said as much at Humphrey Hawkins.
If the FED doesn't change it's nuance to a completely neutral stance and come out and hint that it will react quickly and sufficiently if the credit market situation worsens, I expect SPX 1400 by EOD. If it does go to a more neutral stance, I expect a wild 20 minutes, followed by SPX 1490 or so by EOD. If it eases, well, LOCKED LIMIT up NQ and ES, with YM not far behind.
BTW, notice NQ is very very cautious here, although suprisingly ER2 is green.
nitro
If everyone expects the fed to run to the rescue everytime the markets has a small correction, then do we rally have FREE MARKETS?
Hell no we don't have free markets their only free when they are rising.
When they fall everyone crys for help, it's so fake!
Hell no we don't have free markets their only free when they are rising.
When they fall everyone crys for help, it's so fake!
Calling AAA "wrong and pathetic" is wrong and pathetic in itself. The guy has a near genius IQ. I doubt the same can be said for you.
Flaming aside, stagflation is a difficult pill to swallow.
For starters , yes the curve is quasi inverted. EVERYTHING, from 3mo Bills to the Thirty Year sits below the Funds rate. You speak of those lofty Bond yields last month. Well big deal. Soaring global stock and commodity prices zoomed the Bond all the way to parity with overnights. Not exactly 1981 type stuff.
Hopefully you're right about Bonds. I'm short futures and watching them rally today (in flattening curve action BTW) while equities also rally is not brightening my mood. The fact remains though, the economy is CLEARLY slowing and at some point it's quite possible that economic concerns will outweigh the Fed's fixation with the pressure of rising prices.
So while I think you're right about certain things don't be pig headed or snide because the Treasury market isn't voting for our candidate. Yet......