Photo: Nigel Wedge via Flickr
Tomorrow is Fed minutes day.Deutsche Bank suggests that we might finally hear some squawking from the hawks:
Recall that the minutes of the December meeting adopted a subtly more positive tone, as members noted economic growth “had been moderate, [but] would pick up somewhat going forward.” Furthermore, policymakers viewed the risk of deflation as “having receded somewhat.” The text of the January FOMC statement was strikingly similar to the prior statement, so again we anticipate the tone of the minutes to drift only moderately in a more upbeat direction regarding output and employment. We will watch to see if the inflation discussion shows any evidence of a more spirited debate, as a result of either a more hawkish bent among the new voting members (Fisher, Plosser & Kocherlakota) or in light of strengthening upstream price pressures evident in metrics such as the PPI or prices paid data from various production surveys. In fact, the respective prices paid subcomponents in the NY Empire, Philly Fed, Chicago PMI and manufacturing ISM all stand at post-recession highs. The January FOMC statement nodded to rising commodity prices, but largely discounted this development in light of stable longer-term inflation expectations and the downward trend of underlying measures of inflation. This stance on price stability will become increasingly untenable if consumer inflation heats up, as we project. Along with our recent forecast upgrades for stronger growth and lower unemployment in 2011, we also lifted our inflation targets. We now project yearend CPI at 2.6% y/y vs. 1.4% presently and core CPI at 2.1% vs. 0.7%.