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Goldman Sach's Economic Review
Date
of Release: May 15, 2003:
| With their alteration of the "balance
of the risks" statement, Fed officials signaled a fundamental
shift in monetary policy. Inflation is now too low, rather
than too high. As a result, the long-standing policy of
opportunistic disinflation is no longer appropriate. Instead,
Fed officials want the economy to grow fast enough to put
pressure on resources and push the inflation rate higher.
This means that policy will now be reactive
rather than preemptive. The implication is that Fed officials
will not tighten monetary policy for a long time. In this
respect, the market response since the FOMC meeting has
been appropriate, with the yield curve flattening significantly
over the past ten days.
We believe that Fed officials should go even further and
precommit to keeping the federal funds rate low until
the core PCE deflator rises to 2% on a year-over-year
basis. Although this would require some sacrifice in terms
of policy flexibility, the benefits would include a stronger
anchor for keeping inflation expectations in positive
territory and an even flatter yield curve.
The latest inflation indexes bear out the Fed's concern,
with core consumer prices flat for the second month in
a row in April and up only 1% at an annual rate over the
past six months. With activity data also indicating that
the postwar rebound is still more forecast than fact,
the probability of a 50-basis-point rate cut by mid-year
has risen further.
A dividend tax cut of some form is all but a done deal
now that the US Senate has approved a bill containing
a truncated exclusion. Significant differences between
the House and Senate tax bills still need to be ironed
out, and that will take time. In our view, the final bill
will more closely resemble the Senate version since this
is where the votes have been harder to muster.
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Opinions expressed are present opinions of Goldman, Sachs
& Co. ("GS&Co.") only. The material is based upon information
which GS&Co. considers reliable, but GS&Co. does not represent
that it is accurate or complete, and it should not be relied
upon as such. GS&Co., or persons involved in the preparation
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