Reply #24: Is Inflation Beast asleep? Business Week/Inflation isn't Dead Yet.

[KoKo]

BusinessWeek Online
Inflation Isn't Dead Yet
Wednesday June 16, 8:29 am ET

LABOR WEAKNESS. Lonski thinks the Fed may be willing to tolerate a period of higher inflation in order to avoid destabilizing the housing market with the rapid rise in mortgage rates that aggressive rate hikes would trigger. "The problem is that the Fed is already in a sense behind the curve in that it allowed a steep run up in residential real estate prices," he says.

Lonski also points out that the labor market is still far weaker than it was the last time the Fed began a period of rate hikes to slow the economy. The central bank didn't begin to tighten aggressively until payrolls had expanded by 3.3 million from where they were prior to the start of the 1990 recession, says Lonski. But at last count, payrolls were still off by 1.27 million from February, 2001. Given that, he's not surprised Greenspan isn't in a rush.

"Greenspan is stuck between the bond market, which needs the Fed to be a hawk on inflation, and the political market, which needs job creation to continue," says Peter Cohan, an author and venture-capital investor in Marlborough, Mass.

WATCHING THEIR WORDS. Baker, too, believes Greenspan is in a tough spot, but for different reasons. Since price inflation isn't being driven by a tight labor market this time around, he doesn't think a hike in rates will solve the problem. "This isn't a wage-price spiral," says Baker. "I don't know if there's a lot you could hope to do with short-term rates."

Baker's expectation is that the Fed will hike rates 25 basis points, while claiming in its comments that it remains vigilant on the inflation front. "What matters most is the statement that accompanies the Fed decision," he says.
http://biz.yahoo.com/bizwk/040616/nf200406166601_db042_...