Fellow Shortrunners,

      Last Thursday, when many costumed Americans haunted the town for harmless scares, the Federal Reserve was giving the nation's banking institutions a similar fright.  It released a series of changes to what is known to Fed economists as Regulation A - the Board of Governor's policy governing it's discount window loans to institutions.  The Fed's best known task is setting monetary policy, which it is set to discuss next week as the FOMC debates the merits of another rate cut.  This change addressed one of the other functions served by our central bank, namely that of "lender of last resort."

      After receiving mixed comments from outside sources such as depository institutions, the Board of Governors laid out new guidelines.  Traditionally, when a bank needed temporary funding to prevent insolvency, the Federal Reserve would provide loans from the discount window.  These loans would be easy to repay because they would be at an interest rate below the federal funds rate, known as the discount rate.  At this low rate however, the discount window offered an incentive for banks to borrow even when they were not in risk of becoming insolvent.  To counter this, the Fed often applied further regulation to the borrowing institutions.  This regulation was both costly and acted as a disincentive for floundering firms to use the Fed because it was often not in their interest to increase transparency of their affairs.

     The Fed had long been talking about changing the way in which it gave loans to risky banks.  The new higher interest rate should address a number of issues, including the Fed's desire to cut down on the amount of inappropriate borrowing taking place at the discount window.  It should also reduce the amount of information the Fed has to collect from its borrowers.  Finally, the spread should also allow the Fed to control large swings in volatility.  If this is true, then the change comes at a crucial time in which there are a number of threats to the financial market's stability, including potential deflation and the dollar overhang.  By making it more likely that firms will employ the discount window at the right times, the new regulations aim to make financial crises less likely to occur and less severe when they do.

Economic Releases

The data section provides charts and data for the most important economic indicators. 

Consumer Confidence: 79.4
Release Date: 10/29

• The Conference Board's Index of Consumer Confidence for October plummeted to 79.4 from 93.7 in September.  An important figure for Wall Street, which looks to the index as a gauge of consumer spending, the report of decline in consumer confidence took its toll on the financial markets.  Although many are suggesting that the gravity of this release should push Fed policy makers to cut rates this week, this decrease is likely transitory.  October's consumer confidence figure, based on a survey, was likely depressed due to a number of non-economic events such as the sniper, uncertainty surrounding the Bali bombing, the Moscow theatre incident, North Korea's declaration of nuclear capability, and continued potential conflict with Iraq.

Jobless Claims: 410,000
Release Date: 10/31

• One of the more ghoulish figures to spring up on Thursday was the jobless claims figure.  As economic releases for the week continued to disappoint, jobless claims climbed back above the 400,000 mark, portending Friday's weak employment release.

GDP: 3.1%
Release Date: 10/31

• The Bureau of Economic Analysis's preliminary GDP release for 3rd quarter 2002 GDP refused to be another brick in the wall of bad economic news.  Although overall GDP fell short of most analysts' expectations, a growth of 3.1% is a significant improvement over the second quarter and a far cry from recession.  Furthermore, the release showed signs that business investment may finally be picking back up, a crucial change for the economic climate.  Finally, the GDP's measure of prices showed little signs of possible inflation, good news for Fed policy movers which may be considering further interest rate cuts.

Construction Spending: 0.6%
Release Date: 11/1

• In September, aggregate construction spending rose 0.6%.  Further construction activity should help overall economic growth.  At the same time however, the growth in construction spending was not evenly distributed.  While residential construction projects rose, commercial activity declined.  Such a story offers us another picture in which the American consumer, paradoxically, seems to be keeping economic activity afloat while American businesses struggle with new investment projects.

Personal Income (Consumption): 0.4% (-0.4%)
Release Date: 11/1

• Helping to ease fears that Americans were taking on too much debt was the release of September's personal income figure.  It showed personal incomes rising 0.4% and personal spending falling by 0.4%.  Income growth will help prevent Americans from having to rely on credit activity to finance their spending.  The relative weakness in personal spending has raised eyebrows as economists worry that third quarter's GDP figure is unlikely to be repeated in the 4th quarter.

ISM Manufacturing Index: 48.5% 
Release Date: 11/1

• The Institute for Supply Management's October release on manufacturing activity showed that September's return into contraction of the US manufacturing industry was not a one time event.  Despite a rise in new orders during October, both production and employment indices were seen to be shrinking.

Unemployment: 5.7%
Release Date: 11/1

• At 5.7%, the headline unemployment figure remained unchanged in October.  Many of the components of the employment release from the Bureau of Labor Statistics on Friday were unchanged.  There is one thing to take away from this report.  We certainly are not seeing significant job creation, and as such the overall picture presented by the labor market to date has been relatively bleak.

ECRI Future Inflation Gauge: 0.0%
Release Date: 11/1

• During October, the ECRI Future Inflation Gauge was unchanged, suggesting that inflationary pressure in the short-term is likely to remain subdued.  This is consistent with the story being told by a number of other economic indicators.

ECRI Weekly Leading Index: 118.3
Release Date: 11/1

• The ECRI Weekly Leading Index, a composite of multiple indicators aimed at predicting future economic activity, slipped 0.5 notches to 118.3 last Friday.

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Issue #125

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