Mixed economic news does not preclude further rate hikes

The macroblog looked at the US Commerce Department's April manufacturing report -- showing a 0.9 percent rise in factory orders and a 1.9 percent rise in durable goods orders -- the Labor Department's US productivity report for the first quarter -- which went up at an upwardly-revised annual rate of 2.9 percent but was accompanied by an annualised 3.3 percent rise in the unit labour costs -- and the Labor Department's initial unemployment insurance claims -- which increased by 25,000 last week, the biggest weekly increase in 14 months, to hit 350,000 -- and, after reviewing the views of other economists, concluded that the inflation risk is "a toss-up".

Roger Nusbaum is less equivocal. In his post "What Should The Fed Do?", he wrote that price increases in energy and health care "have not spilled over into the other parts of the economy", and with economic growth looking weak, "I would like to see [the Fed] stop now".

Meanwhile, in Europe, Eurostat reported yesterday that the eurozone's industrial producer price index rose by 0.4 percent in April. Nevertheless, the European Central Bank left interest rates unchanged yesterday. As Edward Hugh wrote in A Fistful of Euros: "No real surprise here", citing Julian Jessop, economist at Capital Economics, who said: "Whether others like it or not, the ECB isn't an activist central bank."

Furthermore, in the purchasing managers' surveys for May, the global input prices sub-index had fallen sharply from 64.2 in April to 56.4 in May, its lowest level for one and a half years. The US, eurozone, China and UK all saw sharp deceleration in input prices.

Of course, the Fed may choose a different path from the ECB. The US is not Europe, and as Fed-watcher Tim Duy said: "[M]anufacturing accounts for just 12.7% of the value added in the economy... To put it another way, 87.3% of the economy is NOT manufacturing. Just ask the homebuilders... The Fed makes policy for the whole economy, not individual sectors."

Well put. Don't write off further interest rate hikes by the Fed yet. Of course, how long rates respond is another story.