Jason Miczek/Reuters
The U.S. economy is still only muddling through, according to revised GDP numbers out by the Commerce Department yesterday. That's bad news. But more disturbing is the accompanying dollar slump against the euro, and what it says about perceptions of our economy versus Europe's.
The Commerce Department's revised report on first quarter GDP showed a dowdy 1.8% growth rate and less consumer spending over that period than originally thought. Economists are calling it a "soft patch" for the first half of 2011, which, without the help of the trusty American consumer, could mean less U.S. job growth and slowing global growth.
The slowdown in consumer spending, revised down to 2.2% growth from 2.7%, is especially troubling. It means that U.S. consumers are finally responding to rising gas and food prices, which puts the Federal Reserve in a tricky spot. The uptick in food and energy prices don't factor into the Fed's decision on whether to raise interest rates, since they're not part of "core" inflation numbers. But a small chorus of Fed officials has recently been arguing that food and energy pressures can't be ignored, because even the expectation of inflation by consumers and businesses can lead to real inflation. In such a scenario, workers and businesses begin demanding higher wages and prices for their goods in anticipation of things costing more in future.
So far, Fed chair Ben Bernanke and the Fed board have argued against this logic (hence the continued rock bottom interest rates). They think food and energy prices can only rise for so long in a weak economy before dwindling demand for stuff cuts off the rise in prices. And policymakers shouldn't worry about what consumers think about inflation anyways, because they're usually wrong, according to a research report out this week by the Fed Bank of San Franscisco. It finds that recent rising consumer inflation expectations (up to 4.4% a year from now from 3.0% at end-2010, according to the early-May Thomson Reuters/University of Michigan consumer survey) reflect consumers' "excess sensitivity" to food and energy prices, because that's what consumers buy the most. So consumers aren't factoring in other purchases like clothing and home improvements.
But food and gas aren't the only things making consumers inflation-wary. Amid its massive bond-buying program, a fiery debt debate in Washington, and a declining dollar, people simply don't trust the Fed. And Americans aren't the only ones. The disappointing first quarter U.S. growth numbers Thursday were followed by a sell-off of U.S. dollars. So even as all hell broke loose in the eurozone over a potential Greek default, the euro made gains against the dollar.
That's a sign that global investors aren't as keen on the safehaven dollar as the Fed would expect. Until now, U.S. officials have thanked their lucky stars that the eurozone crisis has been boosting the dollar's strength. But if Fed officials don't do better at explaining their rationale on inflation to the public, things could take a turn for the worse. What can the Fed do to win back public favor? Set out a specific inflation target, of, say, 2%, just like the trusty old European Central Bank, to blunt the perception that the Fed has its head in the clouds.
Get e-mail updates from TIME's The Curious Capitalist in your inbox and never miss a day.
The Curious Capitalist Favorite Links Barry Ritholtz Calculated Risk Ezra Klein John Gapper Justin Fox Marginal Revolution Mark Thoma Market Observation More Money Paul Krugman Planet Money Street Sweep Swampland adFactory.getCmAd(300, 250, "global", "tout").write(); adFactory.getCmAd(300, 100, "article", "tout").write(); ArchiveMay 2011SMTWTFS1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 More News from Our Partners CNN Why Google TV isn't dead yet Publishers in denial on Amazon's e-book sales 10 Facebook facts and what they say about us Huffington Post Jared Bernstein: Changing the Subject: Where Are the Jobs? 'A Different World': U.S. Government Default A Possibility Mitch McConnell: Medicare To Be Part Of Debt Ceiling Deal DailyFinance.com U.S. Currency Backed by Gold and Silver? Yes, But the 'U' Stands for Utah Beware of Business Credit Cards: A Consumer Protection Loophole How to Get the Most Out of Memorial Day Shopping Rotten Tomato Critics Consensus: The Hangover Part II Could Use Rehab Total Recall: Memorable Movie Bachelor Parties Top 10 Movie Mutants Life Coming Home: Hugs, Tears, Joy Arlington Cemetery: Hallowed Ground The Week's Best Photos: 5.27.11 More on TIME.com » Texas Gov. Rick Perry: I'll 'Think About' 2012 Bid Mason, the Dog Who Was Sucked up by a Tornado and Found His Way Home Mysterious Virus Kills 2 in South Korea Quotes of the Day » "The situation is terrible. They are running in fear from brutal violence, without shelter." JAMES KOK RUEA, Humanitarian Affairs Minister in Sudan, saying that the number of people displaced from Sudan's disputed Abyei region after its seizure by northern troops has reached 150,000 More Quotes » var ad = adFactory.getAd(88, 31); ad.setPosition(13) ad.write(); Today in Pictures » Big Catch Stay Connected with TIME.com Learn More » Subscribe to RSS Feeds Sign Up for Newsletters Add TIME Widgets Read TIME Mobile on Your Phone Become a Fan of TIME Get TIME Twitter Updates adFactory.getCmAd(115, 42, "homepage", "tout").write(); © 2011 Time Inc. All rights reserved | Privacy Policy | RSS | Newsletter | TIME For Kids | LIFE.com Subscribe | Contact Us | Terms of Use | Media Kit | Reprints & Permissions | Opinion Leaders Panel | Help | Site Map TiiAdTrackRevSci(); function tiQuantcast() { } _qoptions={ qacct:"p-5dyPa639IrgIw", labels:tiQuantcast() } var KRUXSetup = { "pubid": "a0aa309c-d0ef-4b32-9684-99ab0888e402", "site":"Time.com", "section":(typeof(s_time.prop16)=="undefined") ? "" : s_time.prop16, "sub_section":(typeof(s_time.prop11)=="undefined") ? "" : s_time.prop11, "userData": { "content_type":(typeof(s_time.prop7)=="undefined") ? "" : s_time.prop7 } }; KRUX.SuperTag.invisibleTags(); Powered by WordPress.com VIP var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); try { var pageTracker = _gat._getTracker("UA-10268691-1"); pageTracker._trackPageview(); } catch(err) {} // /* a.like').click( function(e) { e.preventDefault(); jQuery('#wpl-mustlogin').remove(); jQuery.post( 'http://curiouscapitalist.blogs.time.com/wp-admin/admin-ajax.php', { 'action': 'wpl_record_stat', 'stat_name': 'loggedout_like_click' } ); var tenMins = new Date(); tenMins.setTime( tenMins.getTime() + 600000 ); document.cookie = 'wpl_rand=68752aa16a; expires=' + tenMins.toGMTString() + '; domain=wordpress.com; path=/;'; jQuery('#wpl-count').after( '\ \ \Just one more step to like this post:
\ Username \ Password \ \ \ \Not a member yet? Sign up with WordPress.com
\ \ \ '); jQuery('#wpl-mustlogin').hide().slideDown('fast'); } ); jQuery('#wpl-mustlogin input.input').live( 'focus', function() { jQuery(this).prev().hide(); }).live( 'blur', function() { if ( jQuery(this).val() == '' ) jQuery(this).prev().show(); }); jQuery('#wpl-mustlogin input#wp-submit').live( 'click', function(e) { e.preventDefault(); jQuery.post( 'http://curiouscapitalist.blogs.time.com/wp-admin/admin-ajax.php', { 'action': 'wpl_record_stat', 'stat_name': 'loggedout_login_submit' }, function() { jQuery('#wpl-mustlogin form').submit(); } ); }); jQuery('#wpl-mustlogin a#wpl-signup-link').live( 'click', function(e) { e.preventDefault(); var link = jQuery(this).attr('href'); jQuery.post( 'http://curiouscapitalist.blogs.time.com/wp-admin/admin-ajax.php', { 'action': 'wpl_record_stat', 'stat_name': 'loggedout_signup_click' }, function() { location.href = link; } ); }); }); /* ]]> */ _qoptions={qacct:'p-18-mFEk4J448M',labels:'language.en,type.wpcom,posttag.dollar,posttag.fed,posttag.federal-reserve,posttag.inflation-fears,posttag.monetary-policy,vip.timecuriouscapitalist'}; // var _sf_async_config={uid:3088,domain:"curiouscapitalist.blogs.time.com",pingServer:"ptimeinc.chartbeat.net"}; _sf_async_config.authors = 'Roya Wolverson'; _sf_async_config.sections = 'recession, recovery, sovereign debt, Uncategorized, dollar, Fed, federal reserve, inflation fears, monetary policy'; _sf_async_config.path = '/2011/05/27/should-the-fed-do-more-to-tame-inflation-fears/'; (function(){ function loadChartbeat() { window._sf_endpt=(new Date()).getTime(); var e = document.createElement('script'); e.setAttribute('language', 'javascript'); e.setAttribute('type', 'text/javascript'); e.setAttribute('src', (("https:" == document.location.protocol) ? "https://s3.amazonaws.com/" : "http://") + "static.chartbeat.com/js/chartbeat.js"); document.body.appendChild(e); } var oldonload = window.onload; window.onload = (typeof window.onload != 'function') ? loadChartbeat : function() { oldonload(); loadChartbeat(); }; })(); /* */ try{COMSCORE.beacon({c1:2,c2:7518284});}catch(e){} st_go({'blog':'5320466','v':'wpcom','user_id':'0','post':'14636','subd':'timecuriouscapitalist'}); function st_vt() {var x=document.createElement("img");x.src="http://stats.wordpress.com/g.gif?blog=5320466&v=wpcomvt&user_id=0&post=14636&subd=timecuriouscapitalist&rand="+Math.random();} ex_go({'crypt':'UE40eW5QN0p8M2Y/RE1BNmNJfGhxNCVxUDExYmtib2E/SzdEJm0lUEtXQmxPVWJjOFR8bW8rLEE3ZlJbLDVnd1NPU0ZnN1VxOWN+NH5OL21lUmhUVSwtNXRbV01mSGkxSUE4NFlxMzF5b2xQX19dJm09YjZBVzFIeklWSXgzZVkyTkRbQm9GUVtna0lxRzlfSC5mJk80P3xJUktnOVR1VlM0NFBNUWN6dn5zUFZ4cUFNeHpZbV13fmM4T3AvL2wvM1J2YWdsbHUsaEp1LDB2THBPd35RQ0lzQWVoSVE='}); addLoadEvent(function(){linktracker_init('5320466',14636);});Not a member yet? Sign up with WordPress.com
Read Full Article »