Transcript Indicators that suggest or permit raising rates (or at least refraining

Donald Kohn
Fed Vice Chairman
(hot)
Inflation Risks
(factors that suggest or permit raising rates)
• Increasing wage pressures
(Bloomberg: labor costs rose
fastest pace last quarter in 25
years)
• Low unemployment (currently at
4.4% and declining—BLS)
• Inflation expected to remain
above 2% (WSJ cites estimates of
2.5% in 2007)
• Possible minimum wage hike
from new Democratic congress (not
immediate)
• Industrial production steady
Low Growth Risks
(factors that suggest or permit cutting rates)
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Growth moderating (Q3 data showing 2.2%
annualized rate were above expectations, down from
5.6% Q1, 2.6% Q2; 2007 growth forecasts are low)
Favorable inflation expectations and indicators: in
October, CPI down 0.5%, PPI down 1.6%, core PCE
up only 0.1% points.
Declining energy prices (crude oil down to $54 from
$68 in August, despite Monday’s rise)
Weakening housing market (Bloomberg: new home
sales down 2.4%, single-family homes down 23%, a
loss of up to 1% of GDP)
Recent dollar weakening (plus expected ECB rate
hikes; euro below $1.30 on Friday, rebounded
Wednesday on higher Q3 data)
Lagged effects of past rate hikes (VARs suggest a
peak after three quarters, with effects extending
further)
Inverted yield curve suggests low confidence in
future growth
Overall: Hold Steady
Why? Declining growth indicators suggest rate
cuts within the next six months, but to do so
now would be premature. Despite recent
downward revisions in inflation expectations,
core inflation remains above 2% which
remains our primary concern.