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Economy in Brief

Monetary Policy's Posture: Many "Buts"
by Tom Moeller August 25, 2006

The dissenting opinion at the last FOMC meeting from Richmond Fed Bank President Lacker no doubt reflected more than a concern that economic growth was still too robust to be consistent with moderate inflation, but that various measures of liquidity (money) growth needed further restraint.

Indeed, liquidity growth has slowed. Six-month growth in the monetary base near 2% (AR) is off the 6% highs, but M2 has not slowed as precipitously and recently has picked up some.

The 5-Year TIPS spread is down, but only to the middle of the range of the last year and the futures market is indicating that the forward inflation rate is in a rising trend.

The dollar's value received some lift as the Fed was tightening, but the inkling and then the reality of a pause in the process recently caused the dollar's foreign exchange value to fall back near the bottom of its 18 month range.

Commodity prices. They've had some lift due to higher oil prices and the industrial economy's recovery but the patterns showing strength have been uneven, and these prices in the past have been better indicators of real activity than of inflationary pressure.

Inflation expectations as measured in the University of Michigan survey rose in August to 4.9% for the next twelve months, up off the 2.5% lows of the 2003, but down from last year's highs of 5.5%.

The effects of globalization on inflation and their implications for monetary policy: a speech by Fed Vice Chairman Donald L. Kohn is available here.

The long run benefits of sustained low inflation from the Federal Reserve Bank of St. Louis can be found here.

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