While many on the Street do not foresee any rate hikes from the Fed in 2010, others are going even further by forecasting increases only in 24 months or so.
Stéfane Marion, chief economist and strategist at National Bank Financial disagrees. He notes that core inflation in the U.S. goods sector is running at 3%, well above the price stability definition. The last time it was this high was back in 1992.
Mr. Marion also points out that this rate contrasts sharply with inflation in the 2002 recovery when the economy registered an important price deflation in goods.
“We are not saying that U.S. inflation is on the verge of escalating. There is still slack in the economy and unit labour costs are still receding,” he wrote. “But unlike the previous economic cycle, where outsourcing was the name of the game, the U.S. economy will import inflation from Asia this time around: Asian currencies will likely appreciate in 2010.”
This process has already begun. And while import prices from the newly industrialized Asian economy were down in the 2002 recovery, they are now registering significant monthly increases.
Therefore, since current U.S. monetary policy is “extremely accommodative,” Mr. Marion notes that there is not unlimited room for complacency by the Fed.
So how long can the central bank stay on the sidelines? The economist continues to expect the first official rate hike in August.