Fed changes its focus

So what has changed? Since the middle of 2005 the Federal Reserve has been gradually shifting its focus from growth to inflation. Economic growth has been decent, with GDP hitting a high of 5.6 percent on a quarterly basis in the first quarter of 2006 and payrolls averaging approximately 140,000 since the beginning of the year.

At the same time, oil prices were climbing — an inflationary red flag for central banks around the world. Since December 2005, oil prices increased from approximately $58 a barrel to a high of $78.40 in July 2006 before settling back down to current levels. Throughout this period, every major central bank talked about the price pressures stemming from the higher cost of oil and warned about their need to be vigilant about inflation. This turned inflation into the primary focus of the market, at the expense of growth.

The ISM report comes out on the first business day of every month, which gives the market a sneak peak at how later releases on both inflation and growth might turn out.