Federal Reserve & Interest Rates

The latest data on the US Gross Domestic Product (GDP) indicated some growth for the third quarter. We will not know the details on the fourth quarter until later on. Here is a quick look at some recent economic data on oil, employment, and the markets.

Oil prices

Last week oil prices hit a record high of $100 per barrel. After recent inventory data came in this week, oil costs shrank back to just under $95 per barrel. Chances are that oil will spike again. Heating oil prices peaked in Washington D.C. at $3.77 per gallon. Lower heating costs were at $3.01 per gallon in Nebraska. The average gasoline at the pump is $3.10 for the nation.

Job market

The recent jobs report shows that there was a loss of jobs in December bringing the unemployment rate to a high of 5%. The unemployment rate was steady at 4.7% July through September, with a slight increase to 4.8 in October. After a return to a rate of 4.7% in November, unemployment jumped to the highest rate since the end of 2005 after the hurricanes on the Gulf Coast.

Consumer spending

Generally, holiday spending was weaker than anticipated. Usually retailers can count on gift shopping to boost sales, but with recession looming, foreclosures multiplying, and commodity prices slowly increasing, shoppers were less eager to splurge this time around.

Stock market

It is a traders market these days. Long term investors might feel strained with some downward trends. Shorts are the best bet until things stabilize, which can take some time. View a technical analysis of the stock market on YouTube.com.

US Dollar Exchange rates

The dollar is worth the following in trade value in these currencies:

Euro .68
British pound .51
Canadian dollar 1.00
Japanese yen 109.40
Chinese yuan 7.26

Overall we have fluctuating data with plenty downside risks. Central bankers are divided about the need for further rate cuts to spur economic growth and the impending inflation problems. We are borderline recession.

There are several mixed messages regarding whether or not the United States is facing a recession. We need to take an objective look at the economic factors, and understand that the data speaks for itself.

President George W. Bush recently made the statement that “Recent economic indications have become increasingly mixed.” His statement cannot be more accurate.

On the one hand, we have the sub-prime housing market slowing down the economy overall. Problems that stem from the decline of this market include tightened liquidity in the markets and bank lending ability, low consumer spending, increased unemployment in real estate, construction, and housing related retail. On the other hand, employment in most service-producing industries moved up, production in high tech industries increased modestly, and an increasing demand of exports has offset the higher cost of imports due to the declining dollar. The unemployment rate has held steady, as some businesses are profiting, and housing related business are slipping.

So, are we in a recession already? According to several economists, yes, we are already in a recession.

The dictionary definition of recession is “A period of slow economic growth,” according to Webster’s New World Finance and Investment Dictionary. If I use this definition, I would have to honestly admit that we are facing a recession right now. If you take a look at the minutes from the last FOMC meeting, there is plenty of economic slow down going on.

The chief economist of investment bank Merrill Lynch, David Rosenberg stated, “According to our analysis, this [recession] isn’t even a forecast any more but is a present day reality.”

Expert Martin Feldstein says that we need some serious tax cuts and further interest rate cuts by the FOMC. He isn’t convinced that we have hit a total ‘recession’ and more actions can help avoid it. He does, however, admit that recession is likely.

Whether you believe there is a recession happening now, or there will be one soon, doesn’t matter. The fact of the matter is that our economy is not as resilient as it once was, and it is starting to hit all of our wallets, bank accounts and investments. This year could take a turn, but it will take at least several months before there is enough positive economic data to restore the strength and growth rate of the U.S. economy.

Vice Chairman Donald L. Kohn delivered a speech regarding the communications of the FOMC.  In October, the decision was made that the Federal Reserve needed to improve communications, and make more policy and outlook information available to the public.  Since then, the Fed has made an effort to release as much information as possible, with much criticism.

One of the major complaints was that the ambiguity and mixed messages on the outlook that occur as a result of different members delivering their take on the economic situation.  Each individual have a different perspective, and with the fluctuating data, market performance, and economic uncertainty, how can all members feel the same way?  Kohn expressed the following on the issue:

“The public should understand that the FOMC members do not coordinate schedules and messages, and that members’ views are likely to be especially diverse when, as in the current situation, circumstances are changing quickly and are subject to many different analyses.  The diversity of views on the Committee is one of its strengths and vital to arriving at sound decisions.  As I noted in the introduction to this talk, sound decisions are the most important contributions we can make to further the accomplishment of our public policy objectives.”

Vice Chairman Kohn made it clear that this new communication policy is a “work in progress.”  He stated, “we move slowly in changing what we say in part because ill-conceived communication policy has the power to harm the economy, and, even if that harm were to be realized, the policy could be difficult to alter.”  Kohn also commented that the Fed is trying to avoid giving the impression that they know more than they actually do when making statements.

At the start of his speech, Kohn stated that “Good communication is a complement to good policy, not a substitute for it.”  He expressed the view that clear explanations, good public framework and market feedback would “help to promote good policy.”

The bottom line is that the FOMC is doing the best they can to help the public understand the current economic situation, and they are not at the point where the communication methods are beyond the need for adjustment.