MORNING NEWS WIRE - 19 MAR 2002
FRANK C. KOUBA
SALOMON SMITH BARNEY - CHICAGO
U.S.A. NEWS
The Federal Reserve, which has spent the past 15 months in a recession-
fighting mode, is expected on Tuesday to signal its growing confidence in
the prospects for a solid economic recovery. A majority of top Wall
Street firms are bracing for a subtle policy change from the Fed in which
it might drop its official emphasis on concerns about economic weakness.
That change in the central bank's so-called tilt would have no direct
impact on overnight interest rates but could help lay the groundwork for
eventual increases in borrowing costs, which now stand at a 40-year low of
1.75 percent. "The economy appears to have turned the corner. As a
result, further rate cuts are off the table," said Brian Wesbury, chief
economist at Griffin, Kubik, Stephens and Thompson in Chicago. "The Fed
needs to recognize that by moving to a neutral statement." Several
analysts said Fed Chairman Alan Greenspan was probably foreshadowing such a
switch when he declared in Senate testimony on March 7 that an economic
expansion was "well under way." Tuesday's Fed meeting begins around 9
a.m. EST (1400 GMT). An announcement of any rate decision is expected
around 2:15 p.m. EST (1915 GMT). Within that announcement, the Fed will
also indicate whether it has changed the policy tilt. U.S. stocks and
bonds closed mixed on Monday as investors awaited the outcome. A poll
taken March 15 by Reuters showed that Wall Street bond firms that deal
directly with the Fed in fixed-income markets predicted no change in the
federal funds rate, the key overnight rate for loans between banks. But
19 of the 24 firms in the survey expected the Fed to abandon the tilt it
has had since December 2000, which has stated its concerns about economic
weakness. Those players believe the Fed will issue a post-meeting
statement saying the risks are about evenly balanced between economic
weakness and higher inflation. The poll also suggested a growing belief
that borrowing costs could be headed higher as early as mid-year. For
example, eight of the 24 firms predicted the Fed would begin raising rates
at its June 25-26 meeting, up from four in a March 8 poll. In the latest
poll, one firm forecast a rate rise at the May 7 meeting.
U.S. lawmakers have sent a letter to Treasury Secretary Paul O'Neill saying
the yen's weakness against the dollar was having "a significant negative
impact" on the U.S. automotive industry, Japan's Jiji news agency said on
Tuesday. Jiji said from Washington that it had obtained a copy of a
letter dated Friday in which 17 House of Representatives lawmakers said
that the yen had fallen by an "excessive" amount of over 30 percent against
the dollar since the start of 2000. "If left unaddressed, this trend
could quickly translate into further domestic sales losses, U.S. production
cuts, and loss of jobs," Jiji quoted the letter as saying. The Japanese
government had intervened in currency markets, both directly and also with
rhetoric, to reduce the value of the yen significantly, the letter was
quoted as saying. "Intervention to further weaken the yen by the Japanese
needs to be firmly discouraged by the U.S. Treasury as often as required,"
the letter said. It noted that the U.S. big three automakers, General
Motors Corp, Ford Motor Co and DaimlerChrysler AG, had lost a combined 5.3
percentage points of U.S. market share, due in large part to unfavourable
currency conditions. "This is an alarming development, which has almost
no precedent in a century of U.S. automotive history," it said. No
amount of incentives, marketing or competitive product development would be
enough to compete against Japanese and South Korean automakers using "an
effective 30 percent windfall reduction in prices and business costs", it
added. In the letter, the lawmakers asked O'Neill "to make it very clear
that the United States believes that the actions of the Japanese
government, in actively intervening in currency markets to weaken the value
of the yen, are harmful", Jiji said.
Ratcheting the pressure on Capitol Hill up a notch, Treasury Secretary Paul
O'Neill on Monday cautioned lawmakers that the current ceiling on U.S.
government debt would likely be hit by the start of April. "Under the
most recent projections -- and absent other actions -- the U.S. government
is expected to begin operating at or near the statutory debt ceiling on
March 25. These projections indicate that the statutory debt ceiling will
be breached no later than April 1, when regular monthly government benefit
payments are scheduled to be made," O'Neill said in a letter to
congressional leaders and other lawmakers. A Treasury official, speaking
on condition of anonymity, told reporters that, given the possibility of
errors by Treasury in forecasting its cash position, the ceiling could be
hit as early as March 25 and would almost certainly be reached by April 1.
The letter marked the most explicit guidance yet on when Treasury will have
to start shifting funds around to avoid a potential debt default.
Previously, the department had said only that it expected to hit the cap
within the last two weeks of March. It also puts pressure on lawmakers,
who are expected to leave Washington late this week for a break, to take
action soon or see Treasury employ various accounting maneuvers. O'Neill
said he'll take "necessary steps" to ensure the credit of the United States
is not impaired, should Congress fail to act. "The administration
continues to urge Congress to take appropriate action to provide a
permanent increase in the statutory debt ceiling," O'Neill said. Lawmakers
have differed over the best way to hike the politically sensitive debt
ceiling. Democratic and Republican leaders in the Senate have joined
President George W. Bush in calling a "clean" debt limit hike, one not
attached to other legislation, but House Republican leaders have said they
may wait to attach it to a politically popular measure. O'Neill has been
urging Congress since December to raise the ceiling, which was set at
$5.950 trillion in 1997. He has asked for the third largest hike in U.S.
history -- $750 billion -- to take it to $6.700 trillion. Some Democrats,
though, have balked at the size of the request. As of Friday, the latest
day for which figures were available, the United States had $5.931 trillion
in debt subject to the limit, about $19 billion below the ceiling. The debt
includes government debt owned by private investors as well as Treasury
debt in government trust funds, such as Social Security. While few
observers expect Treasury to come close to a debt default, which would send
shock waves through financial markets, the stalemate could leave the
administration politically vulnerable by forcing it to resort to accounting
maneuvers to stay beneath the cap. House Republicans were sharply
critical of moves taken by then-Treasury Secretary Robert Rubin in 1995 and
1996 to avoid a default when they refused to pass a debt hike amid
rancorous budget negotiations between Congress and the White House.
Rubin danced around the debt ceiling by employing a variety of measures,
including early redemption of Treasury securities held by civil service
retirement funds and delaying or suspending new Treasury debt sales. Those
actions managed to raise about $139 billion outside of the debt limit. |
