Fed Presidents Expect Continued Tightening

Bloomberg’s John M. Berry reports that two Fed presidents, Gary Stern of Minneapolis and Jeffrey Lacker of Richmond, expect continued tightening in the face of robust growth:

The Fed Will Make Several More Rate Increases: John M. Berry, Bloomberg: Federal Reserve officials see U.S. economic growth continuing at around a 3.5 percent pace into 2006 with inflation pressures strong enough to merit several more increases in the Fed's target for the overnight lending rate. Gary Stern, president of the Minneapolis Federal Reserve Bank, summed up the thinking of many of his Fed colleagues when he said in a June 20 interview with a Japanese newspaper (Nihon Keizai), “Right now there's no reason to stop tightening credit.” … inflation pressures -- while still “contained,” in the view of Fed Chairman Alan Greenspan and other officials -- are still strong enough to be worrisome. Companies appear to have regained some of their power to pass cost increases on to their customers through higher … And oil prices have kept rising, rather than receding as many Fed officials had anticipated. … “I have been happy that the pass-through to core has been less than we feared, and that the expectations embedded in the yield curve have subsided noticeably,” Jeffrey Lacker, president of the Richmond Federal Reserve Bank, told reporters on June 20 after a speech to a bankers group in Hot Springs. Virginia. Nevertheless, like Stern, Lacker said, “I think a moderate pace of continued tightening is a sensible outlook at this point and that it is too soon to say when we are going to stop.” … As this year wears on, Fed officials will be watching all the data, as they always do… Economist Robert V. DiClemente of Citigroup … His own best guess as to where the Fed will pause in raising rates: 4 percent.

I’m not so sure about the prediction of a 4% target given the moderate inflation and sputtering employment recently and it’s far too soon to say in any case. For example, today it was reported by CNN Money that:

Leading indicators down in May, CNN Money: A key gauge on the future direction of the economy dropped 0.5 percent last month, resuming a slide that began in January after a standstill in April, a private research group said Monday. The New York-based Conference Board said its index of leading indicators fell to 114.1 in May. It revised April's index upward to an unchanged reading from a previously reported 0.2 percent decline. Only one of the 10 indicators in the index -- stock prices -- increased in May.

At least one knowledgeable observer, James Hamilton, says of the 4% target “I hope that the market guess of a 4% fed funds rate is wrong, and think it probably will be. The Fed couldn't be that stupid, could it?” We shall see. Update: Barry Ritholtz at The Big Picture notes some interesting comments by PIMCO's Bill Gross who sees the Fed pausing at 3.5% by August, and then potentially cutting rates thereafter.]