The FOMC Minutes

The Fed might finally be coming around to the conclusion that inflation is less worrisome than it previously thought. The media will catch up much later. The most important parts of today's FOMC minutes are paragraph 21 and a portion of paragraph 22:

Paragraph 21

While participants noted some recent favorable data on core inflation and labor costs, upside risks to the outlook for underlying inflation remained a key concern. Wage gains had remained modest relative to continued strong productivity growth, suggesting that labor costs were not putting much upward pressure on prices. Indeed, core inflation continued to be subdued, and in recent weeks gasoline prices had unwound a significant portion of their steep increases. Nevertheless, there was a risk that the large cumulative rise in energy and petroleum product prices through the summer would be transmitted to core consumer prices. A number of firms had been reporting a greater ability to pass through increases in energy and other costs to customers, though evidently more so to other businesses than to consumers. A survey measure of the near-term inflation expectations of households had risen notably, but intermediate- and longer-term inflation expectations implied by Treasury security yields had remained fairly stable. It was noted, however, that longer-term expectations of inflation remained contained in the context of an increase in the extent of additional monetary policy tightening expected in financial markets.

Paragraph 22

...Some members cautioned that risks of going too far with the tightening process could also eventually emerge. Nonetheless, all members agreed to indicate at the conclusion of this meeting that a continued measured pace of policy firming remained likely...

As Truman said: "Give me a one-handed economist." The Fed needs to present boths sides of the argument to keep the financial markets from going overboard, but this is the first time in this tightening cycle that the risk of tightening too much has been raised.

Merrill Thinks Monetary Policy is Already Neutral

That is, inflation isn't the threat that everyone is making it out to be and the real danger to the economy is policy overreaction.

11:42 (Dow Jones) "The key to next year's economic and financial market performance hinges upon the Fed not overreacting to the perceived inflation threat," Merrill Lynch says. "We do not share the view that policy is still accommodative." The firm's David Rosenberg says the tea leaves - from a flat yield curve to range-bound equities to a cooling housing market - spell out that the funds rate is already at neutral, but he's not sure the Fed sees it that way. "Not only has the Fed never ceased a tightening campaign with the funds rate at an 'accommodative' level, but it has never stopped at 'neutral' either." (PJV)

Energy Prices

Two recent populist rants have been making the rounds and both concern energy prices. Gasoline prices and natural gas prices are so high, these rants go, that the average consumer will be hard pressed to fill his tank and heat his home.

The following are some data on the central New Jersey market price for a gallon of premium gasoline:

Immediately after Katrina: $3.35 (When my station attendant asked if I was paying by cash or credit I said "bank loan." I heard nothing but crickets, which to me was evidence that he either had no sense of humor or couldn't speak English.)

One Week Ago: $2.80

Today: $2.53


It looks like the tank-filling fear mongering might be a little off. Well, what about the folks that will not be able to heat their homes because natural gas prices are going to be outrageously high?

( DJ ) 11/01 10:15AM DJ US Oil Sector Down On Decline In Gas Prices
By Lisa Sanders

NEW YORK (Dow Jones)--Another decline in natural-gas prices spilled over to the oil sector and sent stocks into an early slide Tuesday. Natural gas for December delivery, which lost 6.5% on Monday, picked up where it left off, falling 51.5 cents, or 4.2% (today), to $11.69 per million British thermal units...

...Warm weather forecasts are behind the drop in energy futures."

(END) Dow Jones Newswires
11-01-05 1015ET
Copyright (c) 2005 Dow Jones & Company, Inc

So, the wholesale price of natural gas in the futures market is down more than 10% in two days. I guess we should all calm down.