Wednesday, December 21, 2005

 

Too Soon To Break Out The Inflation Eggnog: Fed

Bloomberg has the latest on what's driving the US dollar. "The dollar rose for a third straight day against the euro and the yen after a measure of U.S. consumer prices in the third quarter was revised higher. The report reinforced speculation the Federal Reserve will raise interest rates at least two more times. Higher U.S. rates may enhance the yield advantage that has pushed the dollar up about 14 percent against the euro and the yen this year."

"The dollar's gains came before a speech by Fed Bank of Richmond President Jeffrey Lacker today, in which he may signal policy makers will keep raising rates. 'Investors are fixated by Lacker, especially after a series of strong economic data,' said Nobuaki Tani, a senior currency dealer in Tokyo. 'Expectations for U.S. rates will continue to boost the dollar.'"

"The euro failed to sustain earlier gains it made in European trading after Reuters reported the ECB will lift rates in March. The yield on the three-month Euribor contract due in September reached 3.025 percent today, the highest since March. The ECB raised its benchmark for the first time in five years on Dec. 1 to 2.25 percent."

"ECB Chief Economist Otmar Issing is among policy makers who have warned that the increase may not be the last should inflation pose a threat. Inflation in the euro region has exceeded the bank's 2 percent target every month since May. 'We're going to have to get more solid indications that the ECB are preparing to raise rates again soon before people start buying the euro aggressively,' said Paul Robson."

"Richmond Federal Reserve Bank President Jeffrey Lacker on Wednesday said the U.S. economy appeared poised to grow 3.5 percent next year, but warned that inflation risks from high energy prices had not fully passed. 'Growth is on a solid footing, despite this year's run-up in energy prices and the disruptions of a devastating hurricane season,' he said."

"'Granted, housing activity seems to be softening, and at least some potential price level pressures remain, so it may be too soon to break out the eggnog,' Lacker added. 'But inflation expectations remain contained, and we at the Fed are well-positioned to resist inflation pressures, should they emerge.'"

Comments:
Ben,

Is it fair to think that housing prices could fall/correct to the inflation adjusted prices based on the new inflation calculator you linked to? That would mean values are inflated by about 60% here in the inland empire. Just curious if that is how everyone is determining how much values are overpriced. Thanks!
 
Angel,
Inflation adjustment is definitely a part of that calculation. If prices started outside of the trend in 1998, for example, the reversion to the mean calc would add the inflation since then to the trend numbers. This would decrease the correction from the nominal top of the bubble dollar prices.
 
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