Implications: Producer prices fell for a third straight month in November, dropping 0.1%. However, the decline in November was almost all due to falling energy costs. "Core" prices, which exclude food and energy and which the Federal Reserve follows more closely than the overall number, were up 0.1% in November. Producer prices are up 0.7% in the past year. "Core" producer prices are up 1.3% from a year ago, faster than the overall gain but not fast by the standards of the past several decades. As a result, some analysts still say the Federal Reserve has room to continue quantitative easing at the current pace of $85 billion per month. We think this would be a mistake. The problems that ail the economy are fiscal and regulatory in nature; continuing to add more excess reserves to the banking system is not going to boost economic growth, but, for the time being, it won't lift inflation either. The Fed meets next week and will release a new statement on monetary policy on Wednesday, along with an updated economic forecast and projections of future changes in short-term interest rates. Chairman Bernanke will also have a press conference where he can thoroughly explain any changes to Fed policy, or the lack thereof. At this point, we expect the Fed to use the meeting to announce the long-awaited tapering of quantitative easing and also a reduction in the unemployment threshold before the Fed will even start to consider rate hikes. Currently, the threshold is 6.5%. That will probably go down to 6% and Bernanke may hint in his press conference that the Fed has an implicit "trigger" for rate hikes when unemployment hits 5.5%. We'll be discussing the reasons for this Fed policy forecast as well as investment implications in our Monday Morning Outlook.
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Posted on Friday, December 13, 2013 @ 10:26 AM
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