Inflation: is it a threat?

Via Reuters:

Speaking in Washington, [Philadelphia Fed President Anthony] Santomero said policy-makers can move in a "slow and cautious manner" but cannot afford to get "behind the curve."

"We think he meant this in a more general sense, but the market may be reading it as a comment that is reflective of current circumstances," said Alan Ruskin, research director at 4CAST Ltd.

In the past week the bond market has largely discounted potential for the Fed to boost the pace of its interest rate increases.

Rate futures price a 25 basis point increase at the May 3 Federal Open Market Committee meeting, but chances of a 50 basis point hike are just 13 percent.

Santomero told reporters after the speech that the data "is consistent with inflation being reasonably well-contained," but that anecdotes suggest increased price pressure. "I think inflation is worth watching," he added.

So, we can be "slow and cautious" but can't "get behind the curve." Data suggests that inflation is "reasonably well contained," but it's also "worth watching."

This is interesting. I think most people are expecting the Fed to have to get more aggressive sometime, but we don't know when. Words like these seem to increase the uncertainty. This is the new way to "jawbone" long term rates up, and it appears to be working.

Like inflation itself, this development is also worth watching.

UPDATE: St. Louis Fed President William Poole is less ambiguous.

"The upward thrust to the economy appears quite substantial and the risk of higher inflation over the next six months or so seems clearly greater than the risk that inflation will fall below a desirable range," said Federal Reserve Bank of St. Louis President William Poole.

He continues,

"I think the FOMC (Federal Open Market Committee) could improve clarity, especially when policy direction changes, by agreeing in advance on stock phrases to describe different situations," he said.

I think what Poole is trying to say is that "measured pace" is too brief, uninformative, and ambiguous. We can do better at describing a set of contingent paths the Fed might take. He elaborates in his speech.