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Recent commentary by various Federal Reserve members has only supported the case that the FOMC has no intention of cutting rates further in the near-term despite significant downside risks to growth. The comments are especially pertinent given last week’s release of the minutes from the FOMC’s April 29-30 meeting.

US Fed: Inflation Expectations Rise as Oil, Food Prices Prove to Be More Convincing Than Bernanke

Recent commentary by various Federal Reserve members has only supported the case that the FOMC has no intention of cutting rates further in the near-term despite significant downside risks to growth. The comments are especially pertinent given last week’s release of the minutes from the FOMC’s April 29-30 meeting. Indeed, rocketing commodity prices have raised upside inflation risks substantially. Even worse, medium to long term inflation expectations have started to rise, suggesting that the public is not confident that the Federal Reserve can contain price pressures. While many businesses have not been quick to pass through rising input costs to consumers, the end of this practice may be nearing as profit margins get squeezed.

Donald Kohn, Federal Reserve Vice Chairman

			“My expectations for moderating inflation and limited spillover effects from commodity price increases depend critically on the continued stability of inflation expectations…If longer-term inflation expectations were to become unmoored--whether because of a protracted period of elevated headline inflation or because the public misinterpreted the recent substantial policy easing as suggesting that monetary policy makers had a greater tolerance for inflation than previously thought--then I believe that we would be facing a more serious situation.” – May 20, 2008
			“The Federal Open Market Committee will be monitoring inflation developments closely for any sign that our longer-run objective of promoting price stability is threatened… we also need to continue to carefully assess whether, after a period of near-term softness in economic activity, the economy is likely to be on track for sustained economic expansion over time….it is my judgment that monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term.” – May 20, 2008

Kevin Warsh, Federal Reserve Governor  

			“Let me recount just a few of our challenges: significant market turmoil, unsatisfactory economic growth, historic housing price declines, dramatic commodity price run-ups, risk of a secular reversal of global inflation trends, sharp changes in exchange rates, uneven and unprecedented contours of economic growth--and policy responses--across major trading partners, and significant domestic debate regarding optimal economic and regulatory policies…. Inflation has been elevated for some time and prices of commodities are surging. I find these trends particularly vexing at a time when global demand growth, most likely, has slowed.” – May 21, 2008
			“In my judgment, the changes in credit availability during the past six years have less to do with the prevailing stance of policy and more to do with changes in financial markets and financial intermediaries. Returning the economy to equilibrium requires actions more befitting than changes in the federal funds rate alone. The lending facilities created and employed by the Fed are likely proving useful in this regard.” – May 21, 2008

Alan Greenspan, Former Federal Reserve Chairman

			“I still believe there is a greater than 50 per cent probability of recession…that probability has receded a little and I think the probability of a severe recession has come down markedly.” – May 26, 2008

ECB: Trichet Shows No Signs of Swaying

Price stability remains the name of the game in the Euro-zone, as ECB President Trichet continues to tout its importance, especially as energy and food prices skyrocket. Furthermore, with the Federal Reserve – one of the most dovish central banks in the world – signaling that they will not cut rates further, the ECB will face far less pressure to do the same despite instability in the financial markets.

Jean-Claude Trichet, European Central Bank President

			In an interview with the Wall Street Journal, Trichet said that the potential economic fallout from the turmoil in financial markets, coupled with pressures from rising food and commodity prices, add up to “an accumulation of shocks that is clearly not over.” – May 24, 2008
			“It's the judgment of the forecasters themselves that we will deliver price stability in the medium term, when the succession of humps that we have to cope with is dissipated…We (currently) have a protracted period of high inflation rates. But we will preserve the delivery of price stability in the medium term.” – May 24, 2008

Lucas Papademos, European Central Bank Vice President

			“Indeed, the substantial and continuing increase in the price of oil has contributed to the deceleration in the rate of economic growth in the euro area…But, at the same time, it has intensified inflationary pressures…Inflation in the euro area, which reached 3.3 percent in April, is expected to remain at a level significantly higher than 2 percent for the subsequent months and will gradually moderate in the course of 2008.” – May 25, 2008

Klaus Liebscher, European Central Bank Governing Council Member

			“There are considerable upside risks to inflation through wage increases, further gains in food and oil prices.” – May 27, 2008

Jose Manuel Gonzalez-Paramo, European Central Bank Governing Board Member

			“I don't think in any way the banking system is becoming addicted…They are now behaving a little bit different than they were behaving before August 2007, but the reasons behind that are quite obvious to everyone.” – May 26, 2008