Dr. Peter Morici: The Fed's Misstep, and Forecasts for the Weeks of November 5 and November 1

Analysis/Comment
Dr. Peter Morici: The Fed's Misstep, and Forecasts for the Weeks of November 5 and November 1
By Professor Peter Morici, Robert H. Smith School of Business, University of Maryland
Nov 2, 2007, 10:48

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Dr. Peter Morici

The big news this week was not the Federal Reserve’s decision to cut federal funds rate from 4.75 to 4.5 percent, rather the notable event was the Fed's indication it would not likely cut rates further.

The Federal Open Market Committee stated:

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Given how steady inflation has been, despite rising oil prices, many market participants interpreted “after this action, the upside risks to inflation roughly balance the downside risks to growth” to mean “this is it, we are done.” Although the next sentence gives the Fed an escape hatch, players expect that it will take a lot of bad news for the Fed to cut rates again.

Recessionary pressures continue to build, and the Fed will face stronger pressures to cut rates more in the weeks ahead.

A big problem remains adjustable rate mortgages (ARMs) due for resetting or that have only recently reset. Lower long-term mortgage rates would make it possible to transition more ARMs to fixed rate mortgages, including even some mortgages whose outstanding balances exceed the values of their properties by modest amounts.

Also, the market for commercial paper has not fully recovered, and lowering short-terming borrowing rates would permit a larger margin on short-term loans, offering more affordable financing to businesses while further assuaging creditors about risk.

These are temporary and unusual conditions. The threat of recession does not emanate from some internal clock in the economy, as it did in the 1950s and 1960s. Rather, the risk at this time comes mainly from special conditions in credit markets that could be addressed by more creative Administration and Fed policies. Some would include greater flexibility for Fannie Mae and other federally chartered banks, and Fed purchases of Treasury securities on the long end of the yield curve to pull down long rates.

The Fed made a mistake implying this was the end of the rate cuts. It can always change its mind but such flip flopping damages Bernanke's credibility. The Fed should have just cut rates and said further actions would be determined by conditions.

The Fed could be more creative and do more but Bernanke's Fed clearly has trouble thinking outside the box.

Forecasts

Here are my forecasts for upcoming economic data.

Forecast Previous
Period
November 2

Nonfarm Payrolls - Oct 100K 110
Manufacturing Payrolls -7 -18
Unemployment Rate 4.7 4.7
Average Work Week 33.8 33.8
Hourly Earnings 0.3 0.4

Factory Orders - Sept -0.4% -3.3
Durable Goods Orders -1.7 -4.9
Nondurable Goods Orders 1.0 -1.6

Week of November 5

November 5
ISM Services - Oct 55.2 54.8
ISM Prices 66.3 66.1

November 7

Productivity (p) - Q3 3.0% 2.6
Unit Labor Cost 0.8 1.0

Wholesale Inventories - Sept 0.2% 0.1
Wholesale Sales 0.5 0.4

Consumer Credit - Sept $8.0b 12.5

November 8
Initial Jobless Claims 325k 327

November 9

Export Prices - Oct 0.1% 0.3

Import Prices - Oct 0.7% 1.0
Import Prices, ex petroleum 0.2 -0.2
Import Prices, petroleum 2.5 5.4

Trade Balance - Sept -$59.8b -57.7

Mich Cons Sentiment - Nov (p) 79.5 80.9

Week of November 12

November 13
Treasury Budget -$53b 111.6

Pending Homes Sales - Sept 85.5 85.5

November 14
PPI - Oct 0.2% 1.1
Core PPI 0.2 0.1

Retail Sales - Oct 0.3% 0.6
Retail Sales, ex Autos 0.5 0.4
Retail Sales, Autos -0.8 1.2

Business Inventories - Sept 0.3 0.1

November 15
CPI -Oct 0.2% 0.3
Core CPI 0.2 0.2

November 16
Net Foreign Purchases - Sept $80.0b -69.3 (line 19 US Treasury TIC Report)

Industrial Production - Oct 0.1% 0.1
Capacity Utilization 82.1 82.1

November 17
NABE Index 19 18

Peter Morici,

Professor,

Robert H. Smith School of Business,

University of Maryland,

College Park, MD 20742-1815,

703 549 4338

703 618 4338 Mobile/Cell Phone

pmorici@rhsmith.umd.edu

http://www.smith.umd.edu/lbpp/faculty/morici.html

http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm