samuel, tomorrow sets up as a down affair.
Todays recap from Bloomberg:
Fed Holds Overnight Rate at 6.5%; Sees Inflation Risk
quote.bloomberg.com
Bloomberg News
Wed, 28 Jun 2000, 9:10pm EDT
Fed Holds Overnight Rate at 6.5%; Sees Inflation Risk (Update2)
By Noam Neusner
Washington, June 28 (Bloomberg) -- Federal Reserve policy- makers left U.S. interest rates unchanged and warned the economy is still growing at a pace that threatens accelerating inflation. That suggests the Fed could increase borrowing costs by August unless further signs of slower growth emerge.
The Federal Open Market Committee's decision to leave the overnight bank loan rate at 6.5 percent follows recent economic statistics showing a drop in new home construction and a rise in the nation's unemployment rate to 4.1 percent in May. The Nasdaq Composite Index is also 24 percent below its record high in March.
``Although core measures of prices are rising slightly faster than a year ago, continuing rapid advances in productivity have been containing costs and holding down underlying price pressures,'' the FOMC said in explaining its decision to hold rates steady. ``Nonetheless, signs that growth in demand is moving to a sustainable pace are still tentative and preliminary.''
Investors, who had expected the FOMC to leave the overnight rate unchanged at today's meeting, anticipate at least one more quarter-point increase by August, judging by trading of federal funds futures contracts on the Chicago Board of Trade.
The Fed's decision ``doesn't surprise anyone,'' said Cary Leahey, senior U.S. economist at Deutsche Bank Securities Inc. in New York. ``It leaves the door very wide open for a hike in August.''
Stocks Gain, Treasuries Fall
Stocks gained and Treasury securities declined after the report. The Dow Jones Industrial Average rose 23 points, or 0.2 percent, to close at 10527.79. The Nasdaq Composite rose 81 points, or 2.1 percent, to close at 3940.34. The 10-year Treasury note fell 1/8 point, pushing up its yield 2 basis points to 6.10 percent.
The Fed has sought to contain inflation by raising the overnight rate 1.75 percentage points over the last year in six separate increases -- including at each of the first three FOMC meetings this year. As a result, the cost of everything from car loans to mortgages to working capital loans for businesses have become more expensive.
The FOMC doesn't have another scheduled meeting until Aug. 22. That's the Tuesday after the Democratic Party's presidential nominating convention and the point at which the election campaign will begin to heat up and focus attention on the performance of the economy.
The Fed's Board of Governors also left its more symbolic discount rate on loans to banks from the Fed system at 6 percent. Although few banks borrow directly from the Fed to meet their cash reserve requirements, the central bank generally keeps the discount rate within a half point of the overnight rate.
Slower Growth
After expanding at a annual rate of 5 percent or higher for three straight quarters, U.S. economic growth probably slowed to a 3.7 percent pace in the in the second quarter that ends Friday, according to a Bloomberg News survey of economists.
Even so, the FOMC's inflation warning suggests policy-makers are still concerned that the economy's demand for goods and services is outstripping its ability to supply them. Just today, the Commerce Department reported that orders placed with factories for durable goods rose 6 percent in May, the largest monthly gain in more than 15 years.
Energy costs are another reason Fed officials are cautious about declaring a cease-fire in their war against inflation. The average pump price of a gallon of regular gasoline has risen 17 percent since the first of May -- an increase that was missed in the May consumer price report and is certain to show in the June statistics.
``It's easy to over-interpret these slowing signs,'' said Alice Rivlin, former vice chairwoman of the Fed and now a scholar at Brookings Institution. ``There's nothing in the basic situation to indicate that it's running out of steam.''
Still, consumer spending, the driving force of the record economic expansion now in its 10th year, may be cooling. Reports for May showed retail sales fell 0.3 percent and companies eliminated 116,000 jobs. A nationwide industry survey last month showed manufacturing expanding at the slowest pace in more than a year.
Containing Inflation
Market interest rates also show investors' concerns about inflation have diminished compared with five months ago -- reflecting a bet that the Fed's rate increases have contained the threat. On Feb. 1, the 10-year U.S. Treasury note yielded 6.62 percent. Earlier today, the note yielded 6.12 percent. The drop of a half percentage point indicates investors are less worried that inflation will erode the value of their investments over time.
Housing is the segment of the economy most expected to react to rising interest rates, and even with an unexpected rise in May home resales, most housing indicators show cooling. New home construction fell in May to its lowest level in a year. Building permit applications have fallen four months in a row. New home sales fell in April to their lowest level in five months. Existing home sales rose 4.3 percent in May after falling 6.2 percent a month earlier.
Policy-Makers' Comments
Mounting evidence of a slowdown still hasn't convinced Fed policy-makers that they can end their effort to end the inflation threat. Today's FOMC statement is reminiscent of speeches by Fed officials since the beginning of June. During that time, 10 central bankers have spoken, nearly in a chorus saying the economy is still too vigorous for its own good.
There are ``some scattered signs of slowing,'' said Chicago Fed Bank President Michael Moskow. ``But we still are in a period where aggregate demand is growing at a pace that's exceeding potential supply,'' he said in a Grand Rapids, Michigan, speech. ``I haven't seen any significant adjustment up to this point.''
Richmond Fed Bank President J. Alfred Broaddus sounded an even more concerned tone in Vienna, Austria. Core inflation, excluding food and energy prices, ``has shown signs of accelerating,'' Broaddus said. He later emphasized that he was speaking mostly of long-term economic trends, not short-term policy goals.
Consumer confidence slipped in June from an all-time high in May, though the average for the Conference Board's confidence index in the second quarter was the second-best ever, nearly matching the first quarter, figures from the New York-based research group showed. That suggests little slowing in consumer spending in coming months.
And some economists expect that the May jobs report, which showed companies eliminated jobs for the first time in more than four years, is likely to be revised. ``Those payroll numbers just couldn't be believed,'' said Nick Perna, of Perna & Associates in Connecticut. ``There's a question as to whether this slowdown is real.''
Profits Slow
Nevertheless, U.S. companies say they're experiencing slower growth.
``People are more fearful,'' said Robert Toll, chairman a chief executive officer of Toll Brothers Inc. of Huntingdon Valley, Pennsylvania, the nation's largest luxury home builder. With visits to Toll's model homes down about 5 percent than a year ago, ``we are slowing down,'' he said.
Wachovia Bank Corp., the third-largest bank in the U.S. southeast, said earlier this month that second-quarter earnings would fall below analysts' expectations because a cooling economy is making it harder for some borrowers to keep up loan payments. The warning sparked similar concerns at other U.S. lenders, triggering a sell-off in U.S. financial services companies.
General Motors Corp. boosted incentives on several car and truck models after May sales fell 5.7 percent, more than analysts had expected. The GM sales slump was worse than an industrywide decline of 1.9 percent. GM's slide came even though the company had raised its budget for incentives in May by 12 percent over year-earlier levels, according to Morgan Stanley Dean Witter analyst Stephen Girsky.
Circuit City Group recently warned investors that first- quarter profit margins would shrink because of slackening demand for appliances and other electronics.
And Abercrombie & Fitch Co. said a slowdown in sales of women's clothing will hurt its spring and summer selling season, and some analysts expect the company's sales at stores open at least a year to fall 10 percent to 12 percent this summer. For its back-to-school styles the company, which targets college-age adults, expects to charge lower prices compared with last year.
That kind of strategy, if it becomes more common, may give the Fed relief from inflation worries and boost confidence that the economy is back in balance.
``They need to see several quarters of slowing,'' said Bank One's Swonk. Right now, ``we've only taken the icing off a very sweet cake.''
Best Regards, J.T. |
