I was writing up the latest QBR last weekend and had to say something about the end of the rises in the Fed funds rate that came this fall. Looking at the latest Fed funds probabilities made me think it pretty easy to say the Fed is done with tightening.

So Fed Chair Ben Bernanke's comments on the short-term outlook for the economy this morning showed up first on the Wall Street Journal with the headline "Bernanke Warns of Inflation Risks, Suggesting No Rate Cut Coming Soon." His remarks are characterized as "hawkish". This is what raised the alarm:

Looking forward, core inflation seems likely to moderate gradually over the next year or so. Some of the factors that pushed up core inflation in the recent past--in particular, energy prices and shelter costs--appear likely to be more neutral in the coming year, and inflation expectations remain contained. Moreover, if, as seems most probable, the economy grows at a rate modestly below its potential for a time, pressures on resource utilization should ease a bit.

However, as with the outlook for economic activity, there are substantial uncertainties about the inflation forecast. In the case of inflation, the risks to the forecast seem primarily to the upside. Given the current level of inflation, a failure of inflation to moderate as expected would be especially troublesome.

One factor that we are watching carefully is labor costs, which depend on both the compensation received by workers and labor productivity. Although the available indicators give somewhat different signals, it seems clear that labor costs--which account for roughly two-thirds of firm's total costs--have been rising more quickly of late. Some part of this acceleration no doubt reflects the current tightness in labor markets. For example, anecdotal reports suggest that businesses have been finding it difficult to recruit well-qualified workers in certain occupations.

We've always run a question in the survey we do locally asking difficulty in recruiting. When we get more people saying it's getting more difficult than saying less difficult (what most economists would call a 'diffusion index'), that's a bullish sign for the economy. And so far our data has that number positive (including the one to be released soon for fall.)

The Washington Post finds no such alarms. Stefan Geens sees Bernanke being in an unenviable position -- tighter money to combat inflation, looser money to prop up the housing market (where there's a lot of inventory even while sales are up, so prices are down.)

Interestingly, other Fed presidents appear to have been more hawkish after Bernanke's speech. Take in particular this from Philadelphia Fed president Charles Plosser:

Now, over the past two years, the FOMC has moved the federal funds rate up considerably from its historically low levels, so it is possible that inflation could return to acceptable levels without further policy actions. On the other hand, the fed funds rate adjusted for inflation remains relatively low. Thus, to my mind, there remains some risk that policy is not yet firm enough to ensure a return to price stability over a reasonable time horizon.

He notes earlier in the speech that the trend growth rate of the real GDP has shifted down to 3% from 3.5%, so that growth in excess of 3% might be unsustainable (and job growth therefore is probably below the 150-175,000 monthly number we've come to use from memory the last five years.) He blames this shift on both a data revision in July and demographics:

In fact, over the next decade or so we might expect to see trend growth decline further as the growth rate of the labor force slows. Although we frequently note the role of productivity in determining trend growth, the contribution of labor force growth is often overlooked. As the baby-boomers retire, demographic analysis suggests that the growth in the overall labor force will slow. Moreover, we are no longer getting the boost in the labor force from a growing number of women entering the work force, and we also have somewhat lower fertility rates. For all these reasons, labor force growth will slow in the coming years unless it is offset by increased immigration. Barring a boom in immigrants, even if productivity remains strong, the trend growth rate of the economy is likely to moderate.