Speech by Fed Governor Susan Bies on Productivity and Economic Outlook

Fed Governor Susan Bies gave a speech on "Productivity and Economic Outlook" on Wednesday. Some of the first words out of her mouth were that "Real economic activity has continued to expand at a solid pace", which strongly suggests that the Fed is not seeing any slowdown that would cause them to back off from rate hikes.

She notes that consumer spending is "well maintained", construction of new homes is "near recent highs", and business investment in new equipment "expand at a good clip", and that "corporate financial conditions are favorable for investment", further suggesting that the Fed is not seeing any reasons to back off.

Although "core inflation has stayed relatively low in recent months", she notes that "tight resource utilization is likely to put pressure on prices." She notes that "resilient productivity growth appears to be helping contain the inflationary pressures that might otherwise be expected to accompany a narrowing margin of resource slack. That said, we at the Federal Reserve will remain vigilant for any sign of a deterioration in the inflation outlook."

She also talked a little about the role of technology and innovation on the conduct of monetary policy and its potential impact on inflation, saying "Because technology feeds into various macroeconomic aggregates--including household and business spending, productivity, and inflation--its implications for the U.S. economy will continue to necessitate careful observation, improved measurement, and study. Members of the Federal Reserve staff, both at the Board and at the Reserve Banks, have contributed significantly along all three of these dimensions by improving measures of high-tech prices and output and by studying the implications of technology on U.S. productivity. A significant slowing in the pace of technological change could have inflationary consequences. Accordingly, monetary policy makers will remain alert, carefully monitoring technological developments that have the potential to mitigate inflationary pressures as well as developments that could raise the risk of overheating."

Overall, this was basically a "we're almost there but there's still a little more work to do" (my words) kind of speech.

In other words, the Fed will hike this month, maybe in March, depending on the data, and who knows after that, again depending on the data.

You can read our Stock Market Outlook for 2006 and our Daily Stock Market Commentary.

-- Jack Krupansky