Nariman Behravesh Fed Quotations

Perhaps the single best piece of economic news in 2005 was that record-high energy prices did not spill over into the rest of the economy. While the Fed can be relaxed about inflationary risks in the U.S. economy, its role is to preempt.

It is encouraging that core inflation in 2005 was no higher than the year before even though we had record oil prices. From that perspective, the Fed can feel confident that inflation won't get out of control.

While inflation remains tame, inflationary pressures keep building. Thus, the Fed can't let its guard down.

While there is no room for complacency, the Fed can take comfort in the fact that core inflation remains tame, despite some modest inflationary pressures. Global Insight predicts that the Fed is near the end of its tightening cycle.

Both growth and inflation in the coming months could be stronger than financial markets are currently expecting. There is a growing risk that the Fed will have to tighten further and longer than many analysts anticipate.

The Fed seems to have engineered a soft landing.

The Fed can take comfort in the fact that core inflation remains tame, despite some modest inflationary pressures - gradually rising wage inflation, tighter capacity constraints and higher oil prices.

These inflation concerns point to more rather than less tightening by the Fed in coming months.