Thursday, May 12, 2011

Fed Heads Talk Stocks, Inflation and QE2

Quoting Dow Jones earlier this morning: "The U.S. producer price index in April grew 0.8%, when 0.7% was expected. At the core level, prices grew 0.3%, above the 0.2% expectation. "

Compared to a year ago, overall producer prices are up 6.8% and appear to be accelerating:

Two from Real Time Economics:
Fed’s Plosser Highlights Inflation Risks
The Federal Reserve continues to confront risks of rising inflation and must be ready to tighten monetary policy should conditions warrant it, a top Federal Reserve policy maker said Thursday.

“While my expectation is that oil price increases will level off and that the currently elevated inflation measures will reverse, the risks to the inflation outlook are tilted to the upside,” Federal Reserve Bank of Philadelphia President Charles Plosser said in a speech prepared for delivery before a meeting of the New Jersey Bankers Association in Aventura, Fla.

Plosser, who is a voting member this year of the policy-setting Federal Open Market Committee, said “if the economy continues to make progress, then monetary policy will need to exit from its extraordinary accommodation in the not-too-distant future.”...MORE
Kocherlakota Explains Fed Focus On Stock Market
In gauging the success of the Federal Reserve Treasury bond buying program commonly known as QE2, officials like Chairman Ben Bernanke have pointed to a rising stock market as a sign of policy making success.

Against the long course of Federal Reserve history, however, that’s a strange way to justify doing business. For many years, central bankers have declined to comment on the performance of stock markets, and have instead justified their actions in purely economic terms. To the extent financial markets entered into it, central bankers were most mindful of bond markets as the mechanism that translated changes in monetary policy into credit availability for businesses and households.

The stock market only entered into the picture in times of deep market disruptions, or as part of broader discussions about the “wealth effect,” wherein rising stock prices are thought to make households feel richer, and spend accordingly. Of course, stock market operators have always spoken of the a Fed “put,” in which the central bank will ease policy to arrest sustained stock market declines....MORE