Quote from an economist. Why don't we raise the unemployment rate by putting HIM out of a job.
"The Fed will have to bring the unemployment rate up," Mount said, and to do that, interest rates will have to rise much more."
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Investments
Economic Preview
Economic Preview: More
market-friendly data coming
By Rex Nutting, CBS MarketWatch
Last Update: 6:09 PM ET Jun 2, 2000
WASHINGTON (CBS.MW) -- Just when the financial markets have
found the economic slowdown that the Fed's been looking for,
another week of market-friendly data is heading this way.
None of the scheduled data will add anything new to the basic story
that's been told of slower demand, but we will get fresh inflation
data. A tame reading on producer prices should reinforce the
bullish sentiment on Wall Street that the Fed is on the sidelines, at
least until late August.
The schedule of releases in the coming week is light, with only the
May producer price index ranking as a major indicator. The PPI will
be released Friday at 8:30 a.m.
The consensus forecast by economists surveyed by
CBS.MarketWatch.com is for a 0.2 percent rise in the PPI and a
0.1 percent gain in the PPI core.
The other data to be released in the coming week include the
second estimate of first-quarter productivity, April consumer credit,
the services index from the National Association of Purchasing
Management and import prices.
Our consensus forecast says productivity probably remained at
about 2.4 percent while consumer debt is expected to have slowed
to $8.5 billion growth. Import price increases should be a moderate
0.2 percent.
Weak economic data in the past week, including the drop in home
sales, the plunge in factory orders and, above all, the surprising
decline in private-sector employment, have shifted expectations
about what the Fed is likely to do at the June 27-28 meeting and
beyond.
While most economists now think the Federal Open Market
Committee won't raise the Federal funds rate at the June meeting,
they are divided about the Fed's moves later in the year. Some
see definite signs that the economy is slowing to a pace that's
close to what the Fed thinks is sustainable. Others look at a
confident consumer and see no reason for their spending to
slacken.
"It's definitive that they'll wait out June, no matter what the
consumer price index says," said Peter Kretzmer, economist at
Banc of America Securities. Kretzmer said the Fed will want to
hold back and wait for its six tightenings to be fully felt in the
economy, at least as long as inflation remains under wraps.
"The production side (of the economy) is already adjusting" to
lower demand, Kretzmer said.
On the other hand, Joe Abate, an economist at Lehman Brothers,
thinks the Fed is still on course to raise rates in June, "in part to
keep financial conditions from getting too robust."
"The Fed doesn't want the stock market to get carried away
again," Abate said. Both the bond and stock markets have rallied
on the hopes that the Fed may be done, or almost done.
Managing the markets is the trickiest part of the equation for the
Fed because the economy reacts so much more slowly to the Fed
than the markets do. Even if the Fed thinks its actions up to now
will achieve a soft landing in the fourth quarter, it can't declare
victory because the markets would rally and that would boost
spending and investment.
And that could force the Fed to tighten again to counter the effects
of the markets' faith in the Fed.
If you look at some key signals like the yield curve, "it looks like the
market thinks the Fed is going to ease," said Joe LaVorgna,
economist at Deutsche Bank. Not that LaVorgna buys into that
fairy tale: "I believe rates may go up," he said, although it won't be
in June.
LaVorgna thinks the Fed and the markets are repeating the pattern
from 1994, when the Fed boosted rates every other meeting while
the markets flip-flopped between optimism and despondency.
"The question is, how fast is this slowdown occurring?" Abate said.
"The jury's still out." If domestic demand is slowing from 8 percent
growth to 6 percent growth, then more tightening will be needed, he
said.
"The Fed has more work to do," said Greg Mount, senior
economist at Bank One. "We're still above the economy's
long-term potential. It's still got a bit of momentum."
"The Fed will have to bring the unemployment rate up," Mount said,
and to do that, interest rates will have to rise much more.
The problem is, despite a few signals of slowing, consumers are
still very confident. "These consumers still have lots of things going
for them," Mount said, including a great job market, healthy income
gains and significant wealth from the past three years of bull
market.
"All consumers have to do is spend their incomes, and we'll have 4
percent growth," Mount said.
Kretzmer sees a different future. "Things seem to be working out
fairly well," he said. Consumers are already reacting to higher
energy prices, higher interest rates and lower stock prices by
reducing their spending. "Second-quarter spending will be in the
low threes and third-quarter numbers will also look closer to
numbers that are sustainable."
Rex Nutting is Washington bureau chief for CBS MarketWatch.
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