Dollars and Jens
Friday, July 02, 2004
latest numbers and interest rate policy
The jobs report was below consensus (though the household survey was slightly more sanguine), with the latest employment estimate only about 100,000 higher than last month; hourly wages were weak and hours per week dropped, implying a reduction of .4% in the total amount of money going to labor. This is Not Inflationary, and the end-of-year futures moved another 10 bp toward something closer to what I'm thinking lately.

I wish to digress in two directions, so I leave the political direction to its more appropriate forum, and prattle on here about my vision of interest rate policy. One of my arguments for a 25bp hike in May was that, by starting sooner, one could proceed more gradually; over the last few weeks I've come to think, increasingly, that we can proceed pretty gradually even starting June 30. While the economy is certainly looking up, there really aren't strong, credible threats of inflation; the only reason I'd raise rates at all is that I think the economy needs to start restructuring now to be better prepared for more robust inflation prevention in the future. That rates have been so low for so long is one of the big contributors to the low savings rate and asset orientation of the economy that I posted about last night; gradual moves now toward a more neutral rate allow for some adjustment so that any higher rates in the future don't cause quite as much dislocation.

Barring, of course, the unforeseen, I'd give the economy a full three months to digest this first hike, and maybe move another 25bp at the end of September. I don't know that the fed shares quite this view, but you can watch what they say; or, perhaps better yet, watch the futures market watch what they say. Greenspan is known to attempt to correct divergences between market expectations and his own intentions, and as we get closer to the next meeting and he knows what his intentions are, the futures market will probably align with them, by jawboning if necessary.

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