Federal Reserve trapped by stagflation – hawkish about inflation confused about stagnation
Claudia Oscarval
Sep. 28, 2005

US Federal Reserve is finally trapped by the economy. The commodity inflation and wage stagnation/deflation is causing a major headache for Fed.

The US Dollar for the time being is rallying based on higher short term rates and repatriation of funds by US Corporations for tax advantages till the year end.

But fundamentals are gloomy. In the long term neither inflation nor stagnation is desirable for a strong currency.

The yield curve is getting inverted calling for a recession. Federal Reserve is watching the same but they cannot help much except saying this time recession will not happen with an introverted yield curve.

For the time being Dollar is rising with hawkish Fed Comments.

Thomas Hoenig, president of the Kansas City Fed and Michael Moskow, Chicago Fed president, both indicated more interest rate rises were coming as the central bank must be sensitive to heightened price pressures.

The Fed was already seen raising rates at its next two decision making meetings this year by a quarter of a percentage point at each, having moved by that amount at each of its last 11 meetings, taking rates from 1 per cent to the current 3.75 per cent.

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