7/15/2008 -
Growing Number of FED Decision Makers Want Interest Rates to Rise
A few memebers of the FED’s open market committee are reported to have argued at their last meeting that interest rates should quickly be raised, suggesting that downside risks to growth no longer exist. Among the hawks on the FOMC, Dallas Fed Bank President Richard Fisher, voted for a rate hike. Such FED talk about raising interest rates soon is far too premature.
There appears to be two rationales for such a move. To stem inflation or support the dollar. Both arguments are misplaced. Inflation is global in nature. Raising interest rates at this point could only help reduce international inflationary pressures if the FED creates a serious enough recession in the U.S. to put an end to all global economic expansion as well. That would be a terrible mistake.
If the want to prop up the dollar, then a few hundred basis points in interest rates by itself won’t do the trick. The dollar is currently declining at an annualized rate of about 12%. Thus, the FED would have to raise interest rates above 12% to provide a real rate of return for Europeans. That would be an equally disasterous move.
What is the predicament that Bernanke thinks he faces. If the U.S. economy is still struggling significantly, then the economic slowdown will eventually begin to abate inflationary pressures. Bernanke seems to be arguing that we are currently experiencing some very strange version of stagflation. Nonsense. If the U.S. economy continues to slow, then the FED just needs to cool its jets and be patient. Inflation will come down. Of course, it would help immensely if the Federal Government would get serious about its budget deficit. That would do more to take the pressure off the FED than anything.
7/3/2008 - U.S. Job Losses Continue
Prospects for the U.S. economy have greatly dimmed over the last month. Virtually each of the key indicators we’ve said were important to watch this summer now indicate that more economic pain lies ahead. With the addition of 62,000 job losses in June, the U.S. economy has now given up nearly a half million jobs since the first of the year (438,000). Furthermore, initial claims for unemployment are now above 400,000 per week. This is a recessionary level. In addition, oil prices continue to climb, pushing ever closer to the $150/barrel level; and the stock market now is 20%+ off its contemporary peak, indicative of a bear market. During the last two symposia, we strongly emphasized that the national economy could not withstand a hit to its stock market at the same time it struggled with falling real estate values. With the tax rebate checks spent, the consumer will be forced to pull in the reigns even more. But, it is not the softening in retail spending that is the greatest worry (as is often reported in the media). The greatest threat to the U.S. economy is the significant contraction in business investment. Consumer retrenchment is inevitable, but without the support of expanding exports and strong business investment, real GDP will almost certainly decline over the next few quarters and a recession will become “official”.
6/17/2008 - Interest Rates Rising
Short-term interest rates are on the rise. During the past month, rates on 1 year treasuries have risen from 2.06% to 2.51%. The reversal in interest rate trends stems from a consensus that the FED has ended its efforts to reduce the federal funds rate and a general feeling on Wall Street that the next move is likely upward. The culprit is inflation and the falling dollar. The sentiment among the major players within the FED’s open market committee is that while the U.S. economy remains relatively weak, the greatest threat to the economy right now is not the lack of liquidity in the financial markets, but the burden of rising inflation. We at the IRF concur. Without some relief in energy prices soon, the FED will almost certainly be forced to raise rates by year’s end. Adding to the burden of energy prices is the widening U.S. savings deficit, made worse by a mushrooming federal government deficit. Peddling more U.S. debt abroad will almost certainly require rising rates to attract buyers.
4/4/2008 - More Evidence of a National Recession.
A recent spurt of data adds further confirmation to arguments that the U.S. is in the early stages of a recession, though the continuing onslaught of data still presents somewhat of a mixed picture. Most ominous has been the recently released employment data. Friday’s employment numbers indicate that over the past 3 months, total U.S. employment has fallen by 150,000 jobs, a magnitude of job losses not seen since the aftermath of the tech bust earlier this decade. Furthermore, on Friday the BLS indicated that initial claims for unemployment rose to 407,000. As we’ve said before, new claims above 350,000 each week are a warning sign of economic stress, but claims above 375,000 per week are a clear indicator of a recession.
Other worrisome signs are weak retail sales, falling orders for durable goods, and a continued fall in home sales (both new and existing). In addition, money supply statistics suggest that the FED’s reduction in interest rates has done little yet to stabilize the economy.
None of these statistics is a surprise, however. This spring was expected to produce the worst of the national economic numbers. What will be a surprise is if we see these types of numbers latter this summer. Were that to be the case, you can stop talking about a “mild” 2008 recession.
3/11/2008 - The FED’s decision to add another $200 billion of liquidity into financial markets stimulated a major rally on Wall Street with the Dow Jones industrial average increasing by more than 400 points. The Fed's action was a part of a coordinated effort by the FED, the European Central Bank, the Bank of Canada and the Swiss National Bank. These central banks agreed to make loans to investment banks in exchange for mortgage-backed securities. Eventually, it is hoped that this will create a market for these bonds that market participants have found to risky to buy, thereby freeing up the liquidity log-jam in the world’s financial markets. Some, including we at the IRF, believe that this will take the pressure off the FED to lower interest rates much further. While we believe this was a clever, and potentially useful move by the FED, we also believe they need to understand that big banks aren’t the only ones facing a liquidity crisis and that this move will not help solve the debt problem that currently enslaves many Americans.
3/7/2008 - Employment Picture Looks Bleak and Bright.
The national economy just shed another 63,000 jobs, pushing the total job loss for the year to 80,000. This confirms that the first quarter is clearly in a recessionary mode. In addition, mortgage delinquencies continue to reach new highs nation-wide and retail sales have softened further. However, nothing so far about the most recent national statistics has been surprising. The IRF fully expected the first two quarters of 2008 to produce discouraging results. In November, we indicated that stabilization would not likely come until sometime this summer, and that a recovery from this summer’s lows would be painfully slow.
In contrast, the TWC/BLS revisions for Houston were released in partial form on Thursday (Only the new January 2006 and January 2007 employment numbers have been released so far). These new numbers show that Houston gained nearly 100,000 jobs in 2007 in contrast to the originally estimated 60,000 jobs. The upward revision was about 10,000 more than expected. The really pleasant surprise is that Houston’s energy economy has not slowed significantly as previously reported. Given the recently unfolding national trends, growth in the regional energy economy will be crucial to local growth in 2008, .
2/1/2008 - A series of economic data that came out this week has provided a somewhat clearer picture of the U.S. economy. The FED’s move to lower the federal funds rate to 3.0% was not only an important policy move, but a good indicator that the FED believes that the national economy is sinking ever closer to a recession. Part of their explanation is that they now perceive a rather dramatic change in the health of the labor market. This perception was confirmed later in the week by Department of Labor reports on initial claims, which exploded upward by nearly 70,000, and on total job creation, which declined by 17,000 jobs.
Were the job market to remain this weak with initial claims running near 375,000 per week and monthly job growth at or below the zero mark, a near-term recession would be a certainty. On the other hand, the FED’s appropriate reduction in interest rates will eventually help to stabilize the economy. The FED’s move was clearly a bit too late, but not necessarily too little. A federal funds rate of 3.0% is about where rates should be.
We at the IRF still believe that while the probability is high, a recession is not a certainty. However, we also believe that a return to a strong economy is in no way imminent. Throughout all of 2008 the economy will likely remain quite anemic, and the doldrums could extend well into 2009. The nation would be better off without any “stimulus package”. There is just no quick fix right now. Patience and change are the operative words. We must truly fix the problems in our economy that got us here, and that’s going to take time and courage. Attempts at quick fixes which merely cover up the symptoms will actually only drag out the recovery process.
More New Flashes.
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