US Interest Rates - The Quiet About-face

[Guest]

The Fed's moves

US Interest Rates - The Quiet About-face

A quarter point or half a point? The size of the rise in interest rates, to be decided Wednesday by the Federal Reserve, has financial markets holding their collective breath. The high priests of the dollar are almost certain to opt for the minimum increase, but even if the federal funds rate were to rise by half a percentage point, there would be no real cause for alarm. This about-face is a significant one. For the first time in four years, rates will be on the rise again, but it is happening in a very controlled fashion. The Fed seems now to be sure that the overall economic context is getting stronger and more favorable, despite fears of a rise in inflation. The unknown quantity is a constantly rising federal deficit, but those imbalances threaten to cause trouble mainly in the long term. It is a battle that Alan Greenspan will have to fight with whoever is in the White House after November's presidential elections, and three days ago, the Fed did in fact fire its first warning shots about indebtedness, calling it "not sustainable".

Now the governors of the Federal Open Market Committee will have to decide whether the recent uptick in US inflation is just a passing cold, or whether it might develop into something more serious that requires antibiotics. With prices rising by 3% and interest rates formally still at 1%, many fear that America could find itself on a financial roller-coaster.
Some observers even think that Mr. Greenspan is delaying the turning of the screw so as not to slow down growth on the eve of an election at which Mr. Bush, who has just reconfirmed his appointment, will arrive with better economic results than those he has achieved in foreign affairs.

The other week, the Economist caused a sensation with a cover suggesting that America was on it way back to 1970s-style inflation.
In early spring, the Fed also began to nurture similar doubts, but now its studies are coming to different conclusions. There are essentially two decisions currently under discussion, and both have an upside.

1) There will be a rise, as is inevitable after a year at the historic minimum of 1%, but it will be very gradual, in a series of quarter-point increases spread over 18-24 months. The aim will be to avoid the violent shocks that hit the markets after the monetary squeeze of a decade ago. To do this, the Fed is turning its communications strategy on its head. Once, central bankers were inscrutable, and gave no signals until their decision about the borrowing rate struck the market like a thunderbolt from Olympus. But this time, the ground has been prepared for an about-face on the cost of money in a series of announcements, inducing market operators to think that a series of rises will probably take the base rate from 1% to 2.5-3% by 2005.
For the markets, this is OK. True, they have been sluggish for days, but in the past they always collapsed the day before a rise in the cost of money.

2) The Fed has its foot hovering over the brake pedal just in case, but for the time being it seems to agree with this scenario. When Fed economists note that for now price rises give no cause for concern, and in any case only involve gas and food, Middle America blows its top. "Sure, they get driven around and don't buy groceries." In fact, the Fed has to work out whether there are any engines of inflation - apart from oil, over which it has no control - whose ignition might be switched off by a rise in interest rates. It notes that production continues to rise, but capacity utilization is staying relatively low. More growth is possible without putting pressure on prices.

Employment is rising, and wage pressure is increasing with it, but this is normal. The strong growth in profits reported by companies in recent months hints that the wage increases can be absorbed. Productivity continues to rise very satisfactorily, although no one really knows what will happen in the future. The unknown quantities of oil and terrorism, which admit no intervention, continue to weigh in the balance. Finally, there is the underlying imbalance of an over-indebted system. The federal deficit is too high, and households have received an enormous quantity of credit from the financial system. But for some time, expectations of an interest rate increase by the Fed have pushed up market yields by 1%, and this has slowed down house loans, families' main channel of finance. In short, the US economy is alive, and for now the Fed thinks it can keep a firm hand on its imbalances.

Massimo Gaggi http://www.corriere.it

[rainstorm]

the economy is booming, awesome baby!!
sorry you are stuck with that eu beauracratic nightmare that will stifle economic growth there.
by the way, i heard in your incredibly long 300 page "constitution" there was no mention of god.

[Guest]

Italy tried to have Christian Catholic origins mentioned, but the others preferred to have a secular constitution.
As a matter of fact, they might be right. Who can really say where the truth is? Better to keep laws apart from religions.

[wx247]

here we go... again.

[j]

'zzzzzzz...wake me when its over

[wx247]

'zzzzzzz...wake me when its over

By then you will be known as Rip Van Winkle.

[Lindaloo]

LOL Garrett!

**yawns**

[j]

**crash...head hits keyboard

[chadtm80]

'zzzzzzz...wake me when its over

Someone wake me up when its over so that I can wake up j

[rainstorm]

Italy tried to have Christian Catholic origins mentioned, but the others preferred to have a secular constitution.
As a matter of fact, they might be right. Who can really say where the truth is? Better to keep laws apart from religions.

europe, that becomes mired more and more in socialism is headed toward irrelavancy. china, russia, and the united states are the nations that matter now. capitalism is growing from within in china, eating away at the shell of communism