Lara Rhame
Lara Rhame
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This is what the Federal Reserve has been warning about for a long time -- we will still see consumer spending growth, but it will be more moderate than before, ... It's a retrenchment of consumer spending growth from blistering levels.
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The market reacted exactly the way they wanted it to, which was to flatten the yield curve. I think the point is clear: Policy makers are going to do whatever they can to help the Fed. The rate cuts that the Fed is putting through are only hitting the short curve; they're only psychological.
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I don't see the scope for the ECB to match the Fed in terms of raising rates and this will continue to support the dollar. The ECB tends to lag the Fed and even if they hike, the yield differentials are still favorable to the dollar.
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The markets are trying to put this data in the context of how scared the Fed is by it. It's very difficult to see exactly what the Fed views as a continuation of last year's trend of broadly declining price pressure and what the Fed sees as a substantial decline.
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For the Fed, productivity is the antidote to inflation, and that's still very strong. It's inconceivable that the Fed would tighten in four out of its next five meetings.
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The Fed really comes in in situations where the capital markets stop functioning. This not that situation. They're functioning just fine -- they're just really negative.
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Market expectations have priced a rate cut in. When markets are pricing it in like that, the Fed can't afford to give a downside surprise in this environment.
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The report is certainly better than in December, but it just doesn't reflect the level of job creation we'd expect to see at this stage of the economic recovery, or the job creation the Fed would need to see to even consider taking that first step towards tightening.
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Most people at the Fed seem to feel that the national economy is strong enough to absorb the effects of Katrina. That to me seems that you will not see the Fed rate hike derailed.
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There's a growing effort within the Fed to look for other ways to add liquidity into markets and to sustain the interest-rate-led growth we've had. I think they are going to move to a bias to ease policy again, but I'd look for the ease somewhere else. It won't be a rate cut.
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Everybody has to learn a little more economics than they want to learn, now that we're drawing more and more of a distinction between actual GDP and final domestic demand, which is GDP minus inventories. Inventories can surprise. It's hard to make a solid forecast about them, and the Fed said that. I think the market continues to overestimate Fed rate cuts.
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It's not in my forecast, but it's probable, a quarter from now, if we're sitting in the same place we have been, with some uneven signs of recovery, but no real improvement in payrolls and inflation edging lower -- those are the conditions under which the Fed has cut recently.
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Given that the economic data will be strong, people will wonder why the Fed is not moving, which could cause some volatility in the markets. But we think the Fed will remain on hold for quite some time.
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People's outlook for the economy changes much faster than the underlying state of the economy. The Fed tries to keep its eye on the larger ball and not on the ping-pong ball of the stock market.