Fellow Shortrunners,

      The Federal Reserve cut interest rates by an unexpectedly large 50 basis points on Wednesday.  The following day, the European Central Bank (ECB) met to decide Euro zone interest rates.  Led by Mr. Duisenberg, the ECB decided not to act on interest rates, leaving their key interest rate at 3.25% (compared to the US Fed Funds rate which now stands at 1.25%).  At first glance, there appear to be good reasons for the ECB not to follow the Fed's footsteps.  Nonetheless, the ECB may find itself wishing that it had acted if things don't pick back up soon for the Euro area economies.

     The news was met with mixed reactions around the globe.  At home, a number of analysts warned that the Fed's move was an attempt to prevent a deflationary spiral similar to that of Japan.  The Europeans seem not to share a fear of a possible global deflation crisis, or at least not to the same extent.  Indeed, the ECB's decision not to cut rates is more of a signal that they are still worried about possible inflationary pressure. Here, the different ideologies of the ECB and the Federal Reserve come into play. 

     When the European Monetary Union came into being, there was a view that placing the ECB in Germany would be seen as prudent because Germany's central bank had a track record for being quite hawkish on inflation.  This seems to carry on today in the ECB, which stands by its role of preserving price stability and a stated inflation target of 2%.  Nonetheless, Europe continues to suffer from a lack of labor market mobility and sharp unemployment rates.  Labor market problems are being aggravated by an aging population.  To some extent, economic recovery in Europe may be even more fragile than that of the US.  The Federal Reserve shares no similar inflation target.  Though committed to maintaining price stability, a lack of a set target provides central bankers with more flexibility.  What's more, unlike the ECB, the Federal Reserve does have a stated responsibility to pursue stable economic growth, thus the Fed's action can be seen as an attempt to use monetary policy to prevent an economic slowdown.

Economic Releases

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

ISM Non-Manufacturing: 53.1%
Release Date: 11/5

• The Institute for Supply Management's Non-Manufacturing Index continued to show expansion in the service sector of the US economy during October.  At the same time, the pace of expansion declined from September.  Deceleration in the economy has been a key concern for Fed policy makers who fear a double-dip recession.

Jobless Claims: 390,000
Release Date: 11/7

• Jobless claims fell back below the 400,000 mark.  Jobless claims appear to be stabilizing around the 400,000 mark.  Continued declines would be a significant piece of good news.  Economic recovery in the states, indeed in the majority of the developed world, would be much more likely if labor market conditions improved.

Productivity: 4.0%
Release Date: 11/7

• US productivity growth ran ahead at a healthy 4.0% annual pace in the third quarter.  The rise had been anticipated by analysts and is good news for the US economy.  The Federal Reserve continues to maintain that as long as productivity growth remains healthy, long-term growth prospects for the US are appealing.  Unit labor costs, a measure of price pressure, inched ahead at an annual rate of 0.8% during the quarter.

Wholesale Trade: 0.1%
Release Date: 11/7

• Wholesale sales increased 0.1% in September.  Wholesale inventories, bolstered by a lack of automobile sales, rose 0.5% during the same period.  The rise in inventories exceeded analysts' expectations.

Consumer Credit: $9.9 Billion 
Release Date: 11/7

• During September, consumer credit increased by some $9.9 billion in the US.  August's moderate increase, which had been seen as a sign that consumers may be holding back spending plans, was revised upwards as well.  Consumer credit is currently growing at paces as rapid as were seen in 2001.

ECRI Weekly Leading Index: 118.4
Release Date: 11/8

• The ECRI Weekly Leading Index rose to 118.4 last week.  At the same time, the previous week's figure was revised downward from 118.3 to 117.3.  The index's growth rate stands in the red at -4.1%.

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Issue #126

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