Robert CaldwellPolicy? What Policy?
June 11th 2008 21:00
Trends
Americans are struggling. The average American household's net worth and income are down from a year ago. Households are also being hit by a tough job market that is constraining wages and higher costs for fuel and food. Meanwhile, more housing markets are experiencing a vicious cycle of home price declines and foreclosures.
We’ve seen the government attempt to respond, but thus far it has fallen short. What’s in store for the next few months?
Monetary Policy
The Federal Reserve is unlikely to cut rates further due to the high oil prices. The record oil prices and the weak dollar are pushing inflation expectations upwards, resulting in faster inflation growth. Chairman Ben Bernanke has also expressed concern about the inflationary impact of the weak dollar. Due to these concerns, policymakers clearly don’t feel comfortable cutting rates further. They even appear to be preparing financial markets for a rate hike, which will be forthcoming if inflation expectations do fall further out of whack. The Fed will sacrifice near-term growth to achieve stable prices and for the economy’s longer-term prospects.
Fiscal Policy
It also appears less likely that Congress and the administration will come to terms on more help for the housing market before the November presidential election. The Treasury Department’s moral-hazard concerns and the view that there is little policymakers can do anyway to stem foreclosures mean that the housing market is on its own.
What economic indicators (released on Wednesday) could alter policy and markets?
Crude Inventories
Today's report provided confirmation for higher oil prices from supply and demand fundamentals; it is clear that oil producers cannot keep up with the explosive growth in global oil demand. This report lends credence to the expectation that the FED will raise interest rates in order to fight inflation.
Beige Book
The Fed’s Beige Book confirmed the better tone of recent economic data. Although the central bank's most recent survey of economic conditions noted a weakening in some Federal Reserve districts, the survey did not signal that conditions have deteriorated further. This also supports the notion that the FED will raise interest rates during their next meeting.
Treasury Budget
The federal government ran a very large budget deficit in May as a result of the economic stimulus package. So far, through the first eight months of fiscal 2008, the unified deficit is more than twice as large as it was during the same period in the prior fiscal year. With the stimulus package and the poor economy, the budget deficit will grow even larger in the near term. This places a downside risk on further stimulus action by the federal government going forward.
MARKET SUMMARY
Today’s key economic reports hint that monetary policy will turn hawkish in coming months. Moreover, the current fiscal situation will not support increase stimulus. Unless, of course, it is politically motivated because then anything goes. But, as for now, the Treasury situation does not look very good. With the economy holding flat and inflation concerns mounting, it looks increasingly likely that the FED will choose raise rates to tame inflation. Since the fiscal side will be constrained, the economy will take a hit. This message was highlighted in today’s financial markets; the DOW slid 200 points.
If you are looking for more analysis or client-specific work, please contact me at schmidpat@regionaleconomiccon sultants.com
Americans are struggling. The average American household's net worth and income are down from a year ago. Households are also being hit by a tough job market that is constraining wages and higher costs for fuel and food. Meanwhile, more housing markets are experiencing a vicious cycle of home price declines and foreclosures.
We’ve seen the government attempt to respond, but thus far it has fallen short. What’s in store for the next few months?
Monetary Policy
The Federal Reserve is unlikely to cut rates further due to the high oil prices. The record oil prices and the weak dollar are pushing inflation expectations upwards, resulting in faster inflation growth. Chairman Ben Bernanke has also expressed concern about the inflationary impact of the weak dollar. Due to these concerns, policymakers clearly don’t feel comfortable cutting rates further. They even appear to be preparing financial markets for a rate hike, which will be forthcoming if inflation expectations do fall further out of whack. The Fed will sacrifice near-term growth to achieve stable prices and for the economy’s longer-term prospects.
Fiscal Policy
It also appears less likely that Congress and the administration will come to terms on more help for the housing market before the November presidential election. The Treasury Department’s moral-hazard concerns and the view that there is little policymakers can do anyway to stem foreclosures mean that the housing market is on its own.
What economic indicators (released on Wednesday) could alter policy and markets?
Crude Inventories
Today's report provided confirmation for higher oil prices from supply and demand fundamentals; it is clear that oil producers cannot keep up with the explosive growth in global oil demand. This report lends credence to the expectation that the FED will raise interest rates in order to fight inflation.
The Fed’s Beige Book confirmed the better tone of recent economic data. Although the central bank's most recent survey of economic conditions noted a weakening in some Federal Reserve districts, the survey did not signal that conditions have deteriorated further. This also supports the notion that the FED will raise interest rates during their next meeting.
Treasury Budget
The federal government ran a very large budget deficit in May as a result of the economic stimulus package. So far, through the first eight months of fiscal 2008, the unified deficit is more than twice as large as it was during the same period in the prior fiscal year. With the stimulus package and the poor economy, the budget deficit will grow even larger in the near term. This places a downside risk on further stimulus action by the federal government going forward.
MARKET SUMMARY
Today’s key economic reports hint that monetary policy will turn hawkish in coming months. Moreover, the current fiscal situation will not support increase stimulus. Unless, of course, it is politically motivated because then anything goes. But, as for now, the Treasury situation does not look very good. With the economy holding flat and inflation concerns mounting, it looks increasingly likely that the FED will choose raise rates to tame inflation. Since the fiscal side will be constrained, the economy will take a hit. This message was highlighted in today’s financial markets; the DOW slid 200 points.
If you are looking for more analysis or client-specific work, please contact me at schmidpat@regionaleconomiccon sultants.com
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