Thursday, May 11, 2006

The Fed Would Be Unwise to Pause

A expected, the Fed raised rates again yesterday. The issued statement was as ambigous as it could be, saying more or less that there is an equal chance of a pause and a further hike, and that the final decision will be made on the basis of the incoming data between now and the next meeting.

It seems clear to me, however that the Fed simply cannot afford to pause. With the price of oil, gold and other commodities going through the roof, with the dollar declining and with the spread between regular bonds and the TIPS reaching new highs, with wage increases at a new high, it is clearly obvious that consumer price inflation is on the rise. Any pause would undermine Fed credibility and force them to take even more drastic actions later.

Of course, continued hikes are on the other hand likely to push the U.S. economy into a recession as the over-indebted U.S. households can't afford the increased interest burden, but this just illustrates that this inflationary boom is no more sustainable than the previous ones.


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