The Federal Reserve can take a break

John M. Beri, Analyst, "Bloomberg News"

Economic data, published a week ago and the comments of higher Federal Reserve officials strongly suggest that the central bank will pause after the raised interest rate by another quarter-percent at the November meeting on monetary policy.
In a key speech in Connecticut a week ago, vice-chairman of the Federal Reserve, Roger Ferguson, Jr. stressed the importance of economic data in decision-making Central Bank, and he advanced to the forefront of several reasons, cautioned against raising rates too quickly.
"It is clear that the prevailing conditions are important in determining the suitability of the policy," said Ferguson. "Only when the economy appears ready to support the sustainable and steady economic growth, even if the interest rate on federal funds, FOMC might decide that the current policy is acceptable."

Recent data leave several open questions about the effect the expansion of the economy, especially as to whether economic growth fast enough to reduce the significant weakening of the labor market. At the same time, recent data on inflation shows that it is under control.
Fed officials said that their interest rate at 1.75% for federal funds, ultimately, must be raised to a neutral level - or as he called it Ferguson "equilibrium rate on federal funds - is compatible with the economy operating at its capacity conditions of low and stable inflation.

Neutral level
Many policy-makers, Federal Reserve believes that the neutral level may be in the range from about 3.5% to 4.5%. However, some also suggested that as the economy moves towards full employment, may be an acceptable lower intermediate rate on federal funds. Ferguson, in his speech went even further.

"Indeed, in my opinion, the weak fluctuations of business, to increase investment, curbing domestic consumption due to increases in the cost of energy, and the inhibition of domestic production due to the excess of imports over exports - all of this is force pushing equilibrium real federal funds rate to below its perceived long-term level, "said ViceChairman Fed.

Open door
"And, in the context of a well keep inflation in check, apparently preserving nedogruzhennyh resources gives us serious reason to keep the real rate below even the intermediate representations as to its equilibrium level, to enable the economy firmly on the path, which will reduce the amount of nedogruzhennyh resources in a reasonable period of time" , he said. Such statements do not guarantee that it will not increase rates at a meeting on monetary policy in December, but it certainly leaves the door wide open for such a decision.
With regard to recent data, the Ministry of Commerce announced that gross domestic product grew in the third quarter at 3.7% compared with last year, much lower than expected.
The problem was not so much the largest growth, but rather that more than a third of it is due to the increase in purchases of new cars due to a new round of big incentives to buyers from the industry.

Sales poutihli then returned in the current quarter to less after such an energetic start.

Forecasting Growth
In addition, with more rapid increases in spending than the available income of consumers, the rate of personal savings rate fell to just 0.4% - the lowest rate since the quarterly data became available in 1947. It also suggests that consumer spending will likely not continue to rise so quickly in the next quarter. Many analysts have reduced the standards of growth projected over the next year, partly because of the expected impact of higher oil prices, leaving households with less money for their spending on other goods and services. Projections of growth were also slightly reduced, because the companies were suddenly very careful in their decisions about capital investment and hiring. Established Federal Reserve economists, like their counterparts in the private sector, also lowered its expectations for economic growth next year.

Inflation
Meanwhile, stimulating sales of automobiles, which actually lowered the prices of new cars were also a factor that supports the inflation at a low level in the third quarter. Core Consumer Price Index, measuring inflation for most Fed officials, rose by a slight 0.7% year on year, showing the smallest increase for any quarter since 1962.
If the representatives of the Federal Reserve thought that inflation would remain low, and so on, they could not even raise interest rates in November. After last year's concern about the possibility of deflation, some policy-makers, Federal Reserve feel quite comfortable with the level of inflation of less than 1%. Full index of consumer prices rose by only 1.1% in the third quarter. Inflation, of course, somewhat increased, since the increase in oil prices is gradually transferred to the industrial sector, and continue to end-users. A temporary increase in inflation would raise the general level of prices, and then the rate of inflation should be back when oil prices decline, as has been recently. There is no petroleum impact There is no indication that higher oil prices have any effect on the payment of workers. For example, in another report dated 29 October, the Ministry of Labor announced its employment cost index - the most widely available measurement of changes in business costs for salaries and benefits, rose by 0.9% from June to September, slightly lower than analysts predicted. During the year to September, the index increased by 3.9%, which is essentially the same as in the two preceding 12-month period. In other words, the data do not show any signs of any acceleration of labor costs.
However, productivity may have declined in the third quarter for the first time in several years. If so, the cost per unit of labor may have increased. Which in turn probably led to a decline in profits for the quarter, which warned earlier Federal Reserve Chairman Alan Greenspan.

Claims for unemployment benefits
The report on gross domestic product a week ago, showed that since September last year, the economy grew by 3.9%. Over the past six months, the rate of growth was only 3.5%, approximately equal to or possibly less than the potential rate of economic growth. That is the norm, with which the economy can grow without a falling unemployment rate. Indeed, employment, according to payroll increased by an average of approximately 100,000 per month since May of this year. Fed officials believe that should be approximately a monthly increase of 150,000 jobs to keep pace with the growth of the labor force. Increase jobs in 96.000 for September (revised up to 139.000), which may have been reduced because of the hurricane that hit Florida and other states, as well as data for October released a much better prognosis 337.000) will take into account the policy-maker at the time the Federal Reserve their November meeting. The problem, of course, not only in these two months. This outlook for economic growth and demand for labor in the next year.

Forex Magazine
based on www.bloomberg.com