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Friday, September 29, 2006

Kansas Fed President Thomas Hoenig's Inflation & Economic Expectations

By Yaser Anwar, CSC of Equity Investment Ideas

Thomas Hoenig, President of Kansas City Fed says inflation has peaked. According to Hoenig; inflation will stabilize for the rest of the year and will then decline.

"The inflation numbers will stabilize and then continue to come down," Hoenig told an economic forum sponsored by the Tenth Federal Reserve District. Hoenig predicted "a 'very modest, but very steady' downtrend in the core consumer price index toward 2%," reports Reuters.

Core inflation is presently at 2.9%, higher than the Fed’s comfort zone & close to 10 year highs like I reported on September 18th, 2006. Hoenig's core inflation expectations are between 2.5-2.8%. According to Hoenig, "Actions we have taken in the past, in the 1st half of this year are still working their way through the economy."

Hoenig also says that despite uplift in economic growth at the beginning of next year, the economy will grow below potential. Hoenig says the US growth potential is 3% but that the economy will slow to 2-2.5% in the second half of the year and improve to 2.5-3% early next year.

"There is some slack in the economy," commented Hoenig. Hoenig says that the cooling housing market and the cumulative effect of 17 interest rate hikes are weighing on the economy. Housing and energy, according to Hoenig, are the two wildcards that may derail the economy.

The combination of falling inflation and low economic growth could lead to interest rate cuts next year just as the bond market expects. Hoenig, who will have a vote in the Fed in 07, stands behind the decision to stand pat on interest rates.

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