Fellow
Shortrunners,
On Tuesday the FOMC convened another meeting, deciding to leave the Fed Funds rate unchanged at 1.75%. Alan, our knight to be, cleverly changed the committee's bias rather than interest rates themselves (most economists, apart from those at Morgan Stanley, had predicted he wouldn't either). The bias or tilt represents the Fed's outlook for future meetings, either focusing on economic weakness or inflationary pressure, two economic vices managed by the Fed. In other words, Greenspan and Co. are now suggesting that future policy will focus more on maintaining the economy's strength. They note that the economy's recovery appears to be ailing, in part because of financial market weakness and corporate scandals.
Interestingly enough, Greenspan, who is known for his gradual changes in monetary policy seems to have found yet another means of making change slower and more transparent. Going into the meeting, the Fed's bias had been balanced between price pressure and economic weakness. The inclusion of a bias balanced between these two foci has allowed the FOMC to move policy in a two step process between one bias and the other. In spite of all the talk of tilt, at 1.75% the Fed Funds rate is standing at a 40-year low following the 11 cuts of 2001. Furthermore, it has been at this depressed rate for six months, a hefty chunk of time. Low interest rates tend to spark inflation, and with the economy appearing to be recovering from its recession, the Fed, prior to Tuesday, had turned somewhat hawkish from its 2001 expansionary policy.
There are several reasons that changing the bias rather than the overall fed funds rate makes sense. First and foremost, signs of inflation simply are not present. Second, it leaves the Fed with a larger supply of ammunition over the next few months. Economists have only speculated as to what the Fed could do to overcome the zero-bound on interest rates, that is, how can the Fed further influence the economy should the interest rate be lowered to 0%. Third, changing the tilt is a more moderate means of influencing consumer confidence. Cutting interest rates might be taken as a sign that the Fed perceives the economy as falling into a second recession, the double-dip. Such a move could damage confidence, something that impacts investment and consumption. Simply changing the tilt sends a different message, something along the lines of "the data is still showing recovery, it may be weaker, but it's still recovery." Finally, there is the traditional lag argument. Simply put, monetary policy and interest rates operate on a lag. Thus it is likely that the full effect of the 11 interest rate cuts has yet to be felt and that even without changing interest rates the FOMC is still pushing for economic growth through expansionary policy.
Sincerely,
Daniel Hicks
Economic Releases
The data section
provides charts and data for the most important economic indicators.
Retail Sales:
1.2%
Release Date: 8/13
- The Commerce Department on Tuesday suggested that retail sales, bolstered by rising auto sales, rose 1.2% in July. The solid increase should help to prop up consumer spending figures and thus overall growth estimates. Skeptics asserted that the growth was largely driven by and dependent upon low interest rates, as in the automobile sales which contain offers of zero-percent financing.
Business Inventories:
0.2%
Release Date: 8/14
- For the second straight month, business inventories rose 0.2% in June. The increase in inventories occurred despite rising sales, rather than because of falling sales, a positive sign for the economy.
Jobless Claims:
388,000
Release Date: 8/15
- Jobless claims rose by 6,000 last week from an upwardly revised figure of 382,000 the week before. The change was small enough to have little impact on the market or on forecasts of the overall unemployment rate.
Housing Starts:
1.65 Million
Release Date: 8/16
- Housing starts fell to 1.65 million during June. The decrease was, for the most part, unexpected. The 2.7% drop adds to a series of recent weakness recorded for the red hot housing market. Weakness in the housing market, which I still find unlikely given today's low interest rate climate, could easily dip the economy back into recession.
Industrial Production:
0.2%
Release Date: 8/16
- In a relatively positive release from the Federal Reserve, industrial production in the US rose 0.2% in July, its 7th straight month of increase. Continued growth in industrial production is likely to help thwart further talk of a double-dip. The increase was not large enough to change overall capacity utilization which remained low at a rate of 76.1%. Low capacity utilization should serve to contain price pressure, but is also sign of an ailing level of demand and production.
Consumer Price Index:
0.1%
Release Date: 8/16
- The Fed's change in bias from watching for inflationary pressure to watching for economic weakness appeared more appropriate this Friday, as headline consumer inflation rose a meager 0.1% in July. The core index rose a marginal 0.2% as well. Both numbers are low enough to suggest that the Fed is heading in the right direction by keeping interest rates low.
ECRI Weekly Leading Index: 120.1
Release Date: 8/16
- The ECRI Weekly Leading Index fell to a six-month low on Friday, dropping to 120.1. The index's growth rate, which attempts to remove some of the volatility, dropped to 1.5%, but still remained positive. Economists at the ECRI suggested that the index is still indicating future growth.
Site News
The chartroom has been fully updated and is back up and running thanks to some diligent work by theshortrun's Roger Kuo. As for the newsletter itself, I've removed the one advertisement from the side panel which I had placed there.
If you would like to unsubscribe, simply reply with the word unsubscribe in the subject line.
Issue #115
the short run weekly is a free
service. please help support its development
SCREEN SAVER
Do you like our intro movie? Then download the shortrun.com screen
saver now!