Fellow
Shortrunners,
The Federal Reserve will meet yet again on Tuesday to decide the fate of interest rates in the United States. Indeed, there are clear signs of recovery. This alone does not necessarily warrant action, however. As such, most analysts believe that the Fed will leave rates unchanged. The main concern of the Federal Reserve has been and will continue to be price stability. If we add in that the Reserve cares about promoting long-term growth and employment then maybe a period of low interest rates might not be so bad for the domestic economy right now.
For starters, there is simply no evidence for domestic inflation. Price movements have occurred in petroleum, but oil prices typically respond aggressively to conditions of increasing demand (they also tend to respond to threats by superpowers about invading oil producing nations). Thus, the Federal Reserve under Greenspan, which has emphasized the use of core price indices in the past, is more likely to turn the other cheek and view inflationary pressure as subdued. Indeed evidence of recovery is not as strong as some have hoped. Furthermore, the labor market appears to be stagnating rather than expanding. Growth in job opportunities have been met by growth in the labor force to the extent that the overall unemployment rate is unlikely to budge.
Instead of asking whether the Fed will cut rates, some economists have more astutely begun to wonder if the Fed will change its bias or tilt. The bias as it has come to be called is a term that describes a statement of risks released along with each policy decision. As of the last meeting, the Fed believed that the main risk to the economy was still economic weakness. One scenario has that bias shifting from one of economic weakness to one of inflationary fear. The Fed has become known for 'preemptively' moving to strike inflation and such a move is not inconceivable. After all, even if there are few signs of inflation now, if the Fed perceives inflation a threat it may act to prevent it in the future.
The FOMC meeting is not the only important economic event this Tuesday. Last Friday, the EU filed a protest of Bush's 3-year 30% steel tariff seeking compensation through the WTO. A meeting to discuss the issue is set to take place this Tuesday in Geneva. Among the intellectual community of the world, the US is going to find little support for its newest trade barrier.
Finally, another favorite, Argentina continued to plunge further into turmoil. Argentina's situation seems to have gone from bad to worse, and no one seems to have any solutions for the country. Its peso, originally pegged at one to one, has fallen to about 2.5 pesos to the dollar. Moreover, unemployment and business failures have skyrocketed. The latest news is an announcement by its current president, Duhalde, that the government cannot meet IMF stipulations. This means that further aid or loan packages are not likely to be forthcoming in the near future, a development which only compounds the country's current woes.
Sincerely,
Daniel Hicks
Economic Releases
The data section
provides charts and data for the most important economic indicators.
Wholesale Trade: 1.2%
- Wholesale trade activity continued to climb during January, rising 1.2%. The gain helped to continue the recent trend of inventory correction and moved the inventory to sales ratio down to 1.28 from its December release of 1.29.
Retail Sales: 0.3%
- February's release of retail sales showed a modest gain of 0.3%. Continued retail sale activity will be a clear sign that economic activity and that expectations of economic recovery have picked back up. Lackluster retail sales growth may also help to contain fears of consumers burdening themselves with excessive debt.
- Overall business inventories inched forward during January, not keeping pace with the growth rate in sales. If this trend continues it could spell further relief for the manufacturing sector as orders should begin to pick back up and inventories are drawn down.
Import and Export Prices: -0.1%
- With export prices falling faster than import prices, overall terms of trade for the United States deteriorated, falling 0.1%. The gain in export prices was largely the result of rising Petroleum prices during the month of February. If growth in the world economy picks back up, we can expect petroleum prices to continue to rise in step with demand.
Current Account: -$98.8 Billion
- Increased domestic economic activity coupled with deteriorating terms of trade combined to push the current account further into a deficit of $98.8 billion from last month's figure of $85.5 billion.
Jobless Claims: 377,000
- Last week, initial jobless claims fell 3,000 to 377,000. The labor market appears to have stabilized over the past few weeks, and this will likely show in next month's unemployment figures from BLS.
Industrial Production: 0.4%
- After months of decline, total industrial production finally returned to the positive in February, rising some 0.4%. Renewed manufacturing activity is at the heart of the gains. At the same time, capacity utilization rose as well, jumping 0.3 percentage points to 74.8, a positive trend which may signal the beginning of an end to the country's general capacity glut.
Producer Price Index: 0.2%
- Producer prices rose an estimated 0.2% in February. The increase however was largely in the indexes more volatile components and stripping it down to the core index, which excludes energy and agricultural prices, producer prices were largely unchanged. A lack of significant inflation bodes well for the Fed's long string of interest rate cuts which so far have yet to yield much in the way of inflationary threats.
ECRI Weekly Leading Index: 121.9
- The ECRI WLI rose last week from 121.6 to 121.9, continuing to suggest that further recovery is likely. During the past two weeks, the ECRI has largely been driven by its financial components, as the markets have seized upon hopes of recovery.
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