THE
FEDERAL RESERVE ALERT
Federal
Reserve Watch and Commentary
MEETING
OUTCOME:
- The
Federal Reserve Bank FOMC and Board of Governors
RAISED BOTH the Federal Funds & Discount
rates by Fifty bases points (0.50%) to (6.5%
for Federal Funds rates) and to (6.0% for
Federal Discount rates) respectively. The
Federal funds rate is the rate rate banks
charge each other in interbank loans, while
the Discount rate is the rate the Federal
Reserve charges banks for loans.
- The
Federal Reserve also indicated that it sees
inflation risk ahead (signals that they will
likely take strong actions again in June).
MEETING
AGENDA:
- The
Federal Reserve Bank will consider raising
interest rates to tame an inflationary economy.
BEIGE BOOK (12 DISTRICTS) REPORT OF MAY 3RD. 2000
- Majority
of districts reported "moderate to strong"
economic growth. Only the 5th and 7th districts
showed signs of a slowdown.
- Input
prices for manufacturers were higher, while
consumer prices were "relatively stable".
- Labor
unavailability was creating "..more frequent
reports of intensifying wage pressures".
- Demand
for non-financial business services like computer
services, transportation and temporary workers
continue to be strong in most of the districts.
- Third
district (Philadelphia) reported strong price
increases in both manufacturing and consumer
sector. Labor shortages persist. Business
expansion and retail sales were up moderately,
while auto sales was strong. Shipping is expected
to hold to the current strong levels, while
business lending is expected to grow slower.
- Fourth
district (Cleveland) noted worsening labor
shortages, but moderate (3%) wage growth.
Insurance premiums rose up to 10% in some
parts. There was declining mortgage loans
for expensive houses due to high interest
rates.
- Midwestern
"plains" districts (Seventh, Eight,
Ninth & Tenth) The Ninth District (Minneapolis)
reported the strongest economy! Contracts
were up a whopping 17%, and property values
rose that much. The Ninth also reported a
strong Palladium and Iron ore mining (actually
at full capacity), despite a chronic labor
shortage (a law is in the works to reduce
social security penalties for retired recipients
who work). The Seventh (Chicago) reported
a moderate expansion to the economy. Department
Stores sales and auto sales were cooling off,
while auto manufacturing, discount stores,
and labor shortage continue to be strong.
The Eighth district (St Louis) economy also
had moderate growth. Fuel cost and an increasing
labor shortage is pushing wages and benefits
compensations up. Tenth (Kansas City)
reported a tight labor market that is putting
wage pressures especially on entry level positions.
The Tenth had the highest home price increases.
Retail, natural gas, construction and manufacturing
materials prices continue to rise in the Tenth.
- Western
districts (Eleventh & Twelfth) of Dallas
and San Francisco saw increased pressure on
computer parts prices, The Twelfth District
(San Francisco) also reported that the tight
labor market has caused more stock options
and other bonuses to be offered to employees.
San Francisco also reported that higher fuel
costs were affecting profit margins in agriculture,
but not passed on to the consumer, and that
finished goods prices were reasonably stable
despite the high wages. The Eleventh (Dallas)
reported that energy and construction prices
fell, while manufacturing and services sector
prices increased. The labor market remains
very tight.
- The
Mid-Atlantic Fifth District (Richmond) reported
a still robust economy, but a slowing down
in the services sector. Manufacturing remains
strong, but new order have dropped sharply.
Raw materials prices for manufacturing were
high, tourism was up due to bargain hunters
taking advantage of the off-season rates.
Labor availability was tight in most areas
(and employment prerequisites like computer
skills were mostly waived). On the other hand,
West Virginia had a glut of highly trained
computer savvy workers!
- Southeastern
Sixth District (Atlanta) reported a strong
retail sector. A tight labor market is causing
employers to offer bigger sign on bonuses
and better compensation. Manufacturing had
mixed results as more manufacturers migrate
work to Mexico. materials prices are high,
and transporters are passing the high fuel
costs to consumers. Tourism was robust in
Florida and the Gulf States.
- New
England Districts (First & Second Districts)
reported a booming economy. The First District
(Boston) reported a strong manufacturing sector
that most companies are expanding in double
digits. Boston also reported that labor market
continue to be very tight, especially in retailing.
However, the First reported that there was
no sign of consumer level inflation. Manufacturing
also saw few signs of materials price increases,
except in oil related areas. The real estate
market was stable, but inventory of houses
for sale was scarce (Vermont home prices rose
a nose bleeding 10% to 15% for the first quarter
of this year alone!). The Second district
(New York) labor market also continues to
be tight with no sign of consumer inflation.
Retail sales were flat, but real estate saw
a surge in home prices in double digits percent
rises, especially in New York City and Northern
New Jersey. The shortage of paralegals and
legal support staff continues to be acute
on Wall Street as Internet firms lure away
staff with better pay packages.
HUMPHREY-HAWKINS (CONGRESSIONAL) REPORT OF FEBRUARY
17th. 2000
- The
US economy still needs to be slowed down.
- The
"wealth effect" created by the booming
economy and stock market is creating a demand
environment that supply can't meet indefinitely.
- A
tight labor market more serious implications
for the economy due to wage inflation pressures.
- The
surplus should be used to lower tax rates,
rather than spending on programs.
- Economic
growth projected within 3.5% to 3.75%.
- Unemployment
rate projected within 4% to 4.25%.
- Rate
of Inflation for total personal finance expenditures
projected between 1.75% to 2%.
RECENT ECONOMIC DATA RELEASES:
- National
Purchasing Managers (NAPM) reported that its
manufacturing Index declined in March to 55.8%,
which means a modest growth in manufacturing.
The Manufacturing Employment Index also fell
in March to 51.5%, a sign that employment
is weakening. The Manufacturing Price Index
however, rose to 79.8%, a sign that there
is still inflationary pressure in manufacturing
raw materials.
- US
Consumer Credit rose a whopping $12 billion
in February, about $2 billion more than anticipated.
This is the Fourth month in a row that Consumer
Credit has posted strong growth and also outstripped
income growth. This puts a squeeze on lower
income families in form of payment burden.
- US
March net Job gains were 416,000 - slightly
higher than analysts forecasted.
- US
Producer Price Index (PPI), a broad measure
of inflation in manufacturing, rose 1.0% in
March, twice what analysts expected. The Core
PPI gained a modest 0.1%.
- US
retail sales rose well stronger than expected
at 0.4% in March. Core retail sales rose a
whopping 1.4% in the the same period.
- US
Consumer Price Index (CPI) rose 0.7% in March.
Analysts expected a growth of 0.5%. The core
CPI, which excludes the volatile energy and
food sectors, rose an astonishing 0.4% in
the same period, literally doubling Economists'
forecasts, and February's growth of 0.2%.
- US
Initial Jobless claims fell 257,000 for week
ending April 8th., the first time this figure
has fallen below 260,000 since December 1973.
Though a lot of people have been hired for
the Census, this drop actually reflect a tight
labor market.
- The
Conference Board reported that, the US Consumer
Confidence in April dropped only slightly
by 2.5%, despite the recent stock market woes.
- The
Department of Commerce reported that, US Gross
Domestic Product (GDP) grew grew 5.4% in Q1.
The GDP Deflator, a broader inflation gauge,
grew a stronger than anticipated 2.7% in the
same quarter.
- The
Department of Labor reported that, US Economic
Cost Index (ECI) rose 1.4% for Q1, a whopping
0.5% above economists estimates, and the highest
quarterly increase since 1989. Employee benefits
costs was the major culprit with a 2.0% gain.
- US
Factory orders rose a stronger than expected
2.2% in March.
- The
National Association of Purchasing Managers'
(NAPM) Index for April stood at 65.00%, a
solid 1.0% above economists expectations.
- US
vehicle sales for April beat expectations
by 0.2%.
- US
New Homes Sales data for March shows an increase
that outstripped forecasts by 66,000 units.
- U.S.
Joblessness (Unemployment rate) in April stood
at 3.9%, the lowest monthly rate in 30 years,
and 0.1% lower than forecasted. Average hourly
pay grew above forecast by 0.4% in the same
period!
- U.S.
Department of Commerce reported that, Retail
Sales for April dropped 0.2%, the first drop
since August 1998. Analysts were expecting
an increase of 0.5% for the period!
- U.S.
Department of Labor reported that, US Producer
Price Index (PPI), a broad measure of inflationary
pressure in the wholesale sector, unexpectedly
dropped 0.3% in April, 0.1% above economists'
forecast, and the largest drop since February
1999. The Core PPI, which excludes volatile
energy and food sectors, rose in line with
expectations by 0.1%.
- U.S.
Consumer Price Index (CPI), a broad measure
of inflationary pressure in the consumer sector,
was unchanged for April. Analysts were expecting
a 0.1% increase. The Core CPI, which excludes
the volatile energy and food sectors, rose
0.2% in April, in line with expectations.
BOARD MEMBERS' COMMENTS
-
Mr.
Greenspan is concerned about the continued
spending with hopes pinned on a continuously
booming economy. Mr. Greenspan also continue
to hint on the need for higher interest rates
to control the building inflationary pressures.
-
Governor
William McDonough, President of the New York
Federal Reserve Bank, and an influential member
of the FOMC, expressed the need to "..keep
especially alert now.." about price inflation.
Governor McDonough also said " There
is no question that the U.S. economy, especially
in relation to the world economy, is beginning
to exhibit signs of imbalance and strain".
-
U.S
Treasury Secretary Lawrence Summers, although
not a member of the board, but carries a lot
of weight, said he was also "..concerned.."
about inflation (based on the current data).
-
The
recent economic data seem to support their
fears (except the recent retail sales data).
THE GENERAL CONSENSUS ABOUT COMING MEETING:
- The
general consensus is, the Federal Reserve
WILL raise the Federal discount and Federal
funds rates. The Districts' "Beige Book",
CPI, GDP, ECI, Consumer Confidence, Factory
Orders, and the recent Unemployment data overwhelmingly
show signs of wage, consumer spending, and
raw materials cost inflation in the economy.
The April Retail Sales data however, shows
a slowing economy. Most analysts continue
to think the Federal Reserve will raise both
the Discount and Federal Funds rates as high
as 50 bases (0.50%) points.
- We
agree with the consensus, and feel there will
be at least a 25 bases (0.25%) points rate
hike to both the Discount and Federal Funds
rates, based on recent Retail Sales and PPI
data.
FOMC
Meeting date: LAST MEETING: March 21ST. 2000
MEETING
OUTCOME:
- The
Federal Reserve Bank FOMC and Board of Governors
RAISED BOTH the Federal Funds & Discount
rates by Twenty Five bases points (0.25%)
to 6% and 5.5% respectively. The Federal funds
rate is the rate rate banks charge each other
in interbank loans, while the Discount rate
is the rate the Federal Reserve charges banks
for loans.
- The
Federal Reserve also gave a strong sign of
future rate hikes due to "..heightened
inflationary pressures in the foreseeable
future..
MEETING
AGENDA:
- The
Federal Reserve Bank will consider raising
interest rates to tame an inflationary economy.
BEIGE BOOK (12 DISTRICTS) REPORT OF MARCH 8TH.
2000
- Majority
of districts reported "strong" economic
growth, while the rest reported either moderate
growth, or "continued high levels of
activity".
- Prices
rose "..noticeably" in the transportation
and industrial commodities sectors. Commodities
and raw materials like steel, memory chips,
energy & petroleum related, primary metals,
building materials, chemicals, and fertilizers
had "noticeable" price increases.
- Labor
availability was still a problem in a majority
of the districts. As such, "..most districts
reported tight supplies and upward wage pressure
for various types of labor, both skilled and
entry level".
- Demand
for non-financial business services like computer
services, transportation and temporary workers
were strong in most of the districts.
- Overall,
manufacturing was strong.
- Rising
wages and fuel costs have reduced the profit
margins in the transportation sector, especially
in trucking.
- Activities
in the Real Estate sector were "..at
high levels".
- Retail
sales "expanded significantly over their
year-earlier levels" and "..generally
met or exceeded retailers' expectations".
- Demand
for steel was "...especially strong largely
for use in the manufacture of motor vehicles
and other durable goods".
- Consumer
Loans and Residential mortgages were slow
in some districts, but general demand for
bank loans were slow overall.
- Third
district (Philadelphia) reported the fastest
wage gains of all the districts. The district
reported increases in shipping and manufacturing.
Retail sales are still upbeat, but mortgage
activities are cooling off.
- Fourth
district (Cleveland) noted strong increase
in demand for industrial machinery, but declining
consumer and commercial loans.
- Midwestern
"plains" districts (Seventh, Eight,
Ninth & Tenth) The Ninth District (Minneapolis)
reported double-digit gains in Automobile
& Light Trucks sales, and commercial construction
values were up more than 20%; the Ninth also
reported a further pick up in iron ore mining
due to increased demand, while gold mining
is still weak. The Seventh (Chicago) reported
a sharp increase in truckers' wages, a strong
growth and expansion in all loan sectors,
a soft market for Construction & Agricultural
equipment sales; the high hog prices last
year are still benefiting hog farmers. The
Eighth district (St Louis) and the Ninth (Minneapolis)
reported wage gains of 3%-5% and 2%-4% respectively;
the two districts also reported tightest labor
market for Nurses, and a "..near historic
highs" growth in residential construction,
while the Tenth (Kansas City) reported a cooling
off. Kansas City also reported that the decline
in real estate loans pulled all loan sectors
down - the district had one of the tightest
credit quality and lending standards. The
dry weather has harmed winter wheat crops
in the Kansas City district, and that wage
pressures from Q4 have eased, though labor
is still tight in the restaurant and retailing
sectors.
- Western
districts (Eleventh & Twelfth) of Dallas
and San Francisco saw strong demand for semiconductors
and related high tech equipment, transportation
and temporary workers. The previous tight
supplies for semiconductors and flat-panel
display monitors have subsided. The western
districts also reported a strong demand for
non-financial business services like computer
services, and temporary workers. San
Francisco reported that newly created Internet
firms are "spending large sums on advertising
campaigns". San Francisco also reported
cutbacks and ongoing weakness in the Aerospace
sector, strong shortages and turnover for
truck drivers, but a "..noted rising
demand for beef"; Arizona cattle ranchers,
a San Francisco district state, are concerned
about the dry weather in the state. Dallas
reported that the high oil prices are putting
a squeeze on refineries, and most have reduced
output; Gasoline inventories for the district
are low as we approach the busy driving season.
The Dallas district also reported a sharp
rise in office subleasing, but an "..ongoing
decline in lease rates.." for the City
of Dallas. Drought conditions are a worry
in the Dallas district, as wheat and oats
production in Texas increase the cost of herd
feeding and reduction. As for oil drilling
and exploration, oil companies in the Dallas
district are choosing to pay down debts than
expand. Two inland states of the San Francisco
district had a "softened" nonresidential
housing markets, but the district generally
had a strong growth and expansion in all loan
sectors.
- The
Mid-Atlantic Fifth District (Richmond) reported
"..considerable strengthening" in
the manufacturing sector, and a strong demand
for transportation and temporary workers.
The district also reported a strong growth
and expansion in all loan categories.
- Southeastern
Sixth District (Atlanta) reported a weak Aerospace
sector, and a slower nonresidential construction.
The district also reported a cooling off in
residential real estate.
- New
England Districts (First & Second Districts)
reported a strong demand for transportation
and temporary workers. The first district
(Boston) reported cutbacks and continued weakness
in Aerospace. Boston also reported that non-financial
business services were "brisk",
and a revenue growth of 25% for temporary
workers-above previous year's. The Second
district (New York) saw wage increases of
10% to 15% for class of 2000 college graduates.
New York also reported a strong shortage and
turnover for truck drivers. New York also
had one of the tightest credit quality and
lending standards for the period.
HUMPHREY-HAWKINS (CONGRESSIONAL) REPORT OF FEBRUARY
17th. 2000
- The
US economy still needs to be slowed down.
- The
"wealth effect" created by the booming
economy and stock market is creating a demand
environment that supply can't meet indefinitely.
- A
tight labor market more serious implications
for the economy due to wage inflation pressures.
- The
surplus should be used to lower tax rates,
rather than spending on programs.
- Economic
growth projected within 3.5% to 3.75%.
- Unemployment
rate projected within 4% to 4.25%.
- Rate
of Inflation for total personal finance expenditures
projected between 1.75% to 2%.
RECENT ECONOMIC DATA RELEASES:
- The
US Producer Price Index (PPI) was unchanged
in January. Analysts expected a 0.1% increase.
- US
unemployment rate for January stood at 4%,
the lowest level in 30 years - high inflationary
pressure.
- The
Consumer Price Index (CPI) grew 0.2% in January,
lower-than-anticipated.
- US
Industrial production grew a stronger-than-expected
1.0% in January, while capital utilization
rose to 81.6% in the same period.
- The
U.S. Trade deficit for December narrowed to
$25.5 billion.
- US
Housing starts rose higher-than-anticipated
to 1.5% in January.
- The
National Association of Home Builders' (NAHB)
Housing Market Index (HMI) dropped to 68,
the third straight drop.
- Retail
Sales grew a lower-than-anticipated 0.3% in
January.
- US
non-farm labor productivity grew 5% in Q4
of 1999. Labor cost dropped 1.0%, the lowest
since Q1 1996.
- On
March 3rd., the US Labor department reported
that non-farm payroll for February rose a
meager 43,000 - Economist were expecting 206,000.
This is a strong sign that the economy is
cooling off.
- Also
on March 3rd., the US Labor Department reported
that the February Unemployment rate, a strong
measure of inflation, rose 0.1% to 4.0%. Economist
were forecasting 4.0%. Average Hourly wage
rose 0.3% to $13.53, in line with expectations.
These suggest the economy might be cooling
down to non inflationary levels.
- US
productivity grew 2.9% in Fourth Quarter (Q4)
of 1999, with manufacturing having the greatest
increase. Aggregate unit labor cost dropped
1.0% in the same period.
- The
US Producer Price Index (PPI), a good indicator
of inflationary pressure on the industrial
side of the economy, rose a full 1% in February,
twice what analysts were expecting; the Core
PPI, which excludes volatile sectors like
food and energy, rose 0.3% in the same period,
One bases point (0.1%) above analysts' forecasts.
- The
US Consumer Price Index (CPI), a broader gauge
of inflationary pressure on the consumer side
of the economy, rose 0.5% in February, analysts
were expecting a 0.4% rise; the Core CPI,
which excludes volatile sectors like food
and energy, rose 0.2% in the same period,
in line with analysts' forecasts.
BOARD MEMBERS' COMMENTS
-
Federal
Reserve Board members are voicing their opinions
clearly about the need to slow the economy
before it becomes inflationary. The Federal
Reserve chair Alan Greenspan seem to be most
concerned about the "Wealth Effect"
that high equity prices are creating. Mr.
Greenspan also seem to be concerned about
the "lax" lending practices of financial
institutions, who are pinning their hopes
on a continuously booming economy.
THE GENERAL CONSENSUS ABOUT COMING MEETING:
- The
general consensus is, the Federal Reserve
WILL raise the Federal discount and/or Federal
funds rates. The Districts' "Beige Book",
the PPI, and CPI reports are full of overwhelming
signs that the wage pressures, consumer spending,
and raw materials cost are building a bubble
into the economy.
- We
agree with the consensus.
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