Fed Speedbumps May Be Slowing Economy
May 30, 2000 5:19 pm EST
By Genevieve Wilkinson
NEW YORK (Reuters) - Economic reports and corporate data suggest the U.S. Federal Reserve is succeeding in its year-long quest to slow red-hot growth, but this does not rule out the need for higher interest rates, economists said on Tuesday.
Evidence including a decline in April's orders for big ticket items, 30-year mortgage rates at five-year highs, a slowing in consumer spending and tighter lending standards show the world's largest economy, while still too hot for the Fed's inflation-sensitive taste, is staging a pullback.
"I'm hesitant to call it a total turnaround," said Jeffrey Palma, U.S. economist at UBS Warburg in Connecticut. "But we are getting some moderation of growth."
One outgoing Federal Reserve official told Reuters on Tuesday that the Fed's work in fighting inflation had begun to ripple through the economy.
Federal Reserve Bank of Philadelphia President Edward Boehne said in an interview that slower consumer spending, less investment activity and range-bound equity markets were signs the U.S. economy was slowing.
"I think we're still in the preliminary stages and it's too early to say for sure, but there are some early indicators that the rate hikes are beginning to moderate the economy," said Boehne, who retires on Wednesday after 19 years as president of the Philadelphia Fed. This year Boehne has also served as a non-voting member of the Federal Open Market Committee, the Fed's interest rate-setting arm.
But economists warned the evidence of a slowdown was not
widespread or sustained enough to stop the Fed from raising the fed funds lending rate, that banks charge one another for overnight loans, beyond its current level of 6.50 percent.
"We're not at the end of the Fed tightening cycle yet," said Stan Shipley, senior economist at Merrill Lynch in New York.
FED GRAPPLING WITH "OBSCENE" GROWTH
Fed Chairman Alan Greenspan and his inflation fighting team have spent the past year grappling with an economy growing at what one economist termed "obscene" rates.
Gross domestic product -- the broadest measure of economic activity -- grew at an annualized rate of 7.3 percent in the fourth quarter 1999 and 5.4 percent in the first quarter of 2000. The Fed would be more comfortable with growth in the 3.0 to 4.0 percent range.
In total, the Fed has raised rates six times since last June in an attempt to ward off the rising prices that often accompany rapid growth.
"Anyone who believes the Fed's actions are not being felt in the stealth U.S. economy has chosen not to believe the Commerce Department data or is not listening to companies," Thomas Galvin, chief investment officer at Donaldson Lufkin & Jenrette, said in a client report issued Tuesday.
The April durable goods report released on Friday was much weaker than expected, sinking at its fastest rate, 6.4 percent, in more than eight years. And U.S. retail sales in April fell 0.2 percent, the second month in a row it has decelerated.
Moreover retailers Costco Warehouse Corp. (COST.O), Target Corp. (TGT.N), Dollar General (DG.N) and Office Depot (ODP.N) have all posted a slowdown in sales.
Residential mortgage demand is declining, banks are becoming more cautious with tighter lending standards and new-issue markets are essentially closed to capital-hungry growth franchises, according to Galvin.
Still, economists cautioned against investors assuming that the economy was already well on the way to slowing to a sustainable rate.
"Let's not get carried away," warned Mitchell Held, chief economist at Salomon Smith Barney, noting that one month does not set a trend. "There are some signs of slowing from an unbelievably strong pace, but the question is, is it slowing enough?"
FINANCIAL MARKETS SLOW TO DRAW SAME CONCLUSION
Economists also noted that while certain economic reports did suggest a respite from strong growth, recent heavy falls in equity prices pointed to a less clear-cut outcome for the U.S. economy.
"I don't think the equity markets have performed in a way yet that suggests the economy has really slowed," Palma said.
Economists said if a turnaround was imminent and the markets were convinced the Fed had come to an end of its tightening cycle, stocks would bound higher.
The technology heavy Nasdaq composite, though 6.3 percent higher on Tuesday afternoon, erasing last week's losses, but still 34 percent lower than its record high of 5,132. |
