The caveat is if the stock market continues to rocket. The market was fully anticipating the Fed to retain the bias toward raising rates. Obviously, a significant rise in that data, such as the Employment Cost Index and the Consumer Price Index, will provoke a response from the Fed, but stable prices don't automatically negate the possibility of still-higher interest rates. But both Greenspan's specific explanation of last year's emergency rate cuts, and officials' public comments during the last two months indicate they're worried that demand will eventually result in wage or price inflation. A rallying stock market will only enhance demand, and Kenworthy's going to be watching the consumer spending and housing figures over the next few months.
Inflation is looked at as a lagging indicator.
If we get a pickup in inflation indicators, the market's interpretation might be that it's too late. The Fed's Beige Book, its anecdotal survey of economic activity, said last month that producers across the country were reporting wage pressures. Greenspan said in his remarks June 17 that a 3 percent rate of growth is what's currently sustainable in this economic environment, and the approximate 4 percent rate this country has been running at during the last three years is a result of a continually diminishing labor pool. The Fed's worry that this will lead to wage pressures is the foundation for why it'll continue to be preemptive, Quan said. Y Many believe the Fed is on track to reverse the three 1998 interest-rate reductions taken in response to the global economic crisis.