Federal Reserve & Interest Rates

According to the head of the Nissan Motor Company, the United States auto industry is in recession, even if the entire economy is not.  

Chief Executive Officer of Nissan, Carlos Ghosn expressed that there is definitely a recession in the auto market.  The rising costs of auto building materials are increasing risks in the auto industry.  The 2007 car and light truck sales were the worst in ten years, and are not expected to get too much better during 2008.

CEO Ghosn does not expect the U.S. auto recession to last for an extended time, however.  Prices for raw materials need to lower.  Ghosn explained that European markets cannot be ignored, and they need to be utilized, especially Russia.

In other economic news, the dollar weakened against the euro again.  Thoughts on the dollar’s strengthening against the euro being short-lived were exactly on target.  Recession fears in the United States escalated, while European service sectors showed growth.  The European Central Bank may not cut rates, after all.  The euro is now at $1.4861, which is the highest it has been for three weeks.  The dollar also fell against the yen.

A modest rate cut is still expected of the FOMC in the coming March meeting.  The business index in The Federal Reserve district of Philadelphia plunged to negative 24 this month.  Chances of a larger rate cut are fairly slim, considering the weakness of the dollar and the current inflation rate, which is higher than the Fed is comfortable with.

Oil prices remain upwards of $98 per barrel, despite the inventory increase of domestic crude oil, keeping fuel and energy costs high.  This is down from over $100 per barrel earlier, but still too high to keep core inflation down.

Meanwhile, the Federal Reserve is continuing the Term Auction Facilities, with the next on scheduled for Monday, February 25, 2008.  The budget remains at $30 billion and awards are still 28-day loans for bidding banks.

As usual there is mixed economic news, and the stocks have not yet recovered completely.  There is little left to do but wait and see how monetary policy takes effect for the year.

The Consumer Price Index information was released today showing a higher than expected rate of inflation in January than expected.

The Department of Labor reported the following:

“On a seasonally adjusted basis, the CPI-U increased 0.4 percent in January. The indexes for food and for energy each advanced 0.7 percent, following increases in December of 0.1 and 1.7 percent, respectively. The index for all items less food and energy rose 0.3 percent, following increases of 0.2 percent in each of the preceding nine months. The January advance reflects larger increases than in December in the indexes for apparel, for medical care, for recreation, for education and communication, and for other goods and services.”

The overall increase in the Consumer Price Index over the passed 12 months was 4.3%. Seasonally adjusted special indexes on energy and food costs alone rose 0.7% last month. On an annual basis, food increased 4.9% while energy skyrocketed with an increase of 19.6%.

Inflation has been a secondary expressed concern of the Federal Reserve, as the primary goal at this point is to stave off recession and promote overall economic growth. Continued rate cuts are still expected, despite the higher than expected CPI. Data on the pricing conditions might cause upcoming rate cuts to be more modest, however.

The FOMC is more comfortable with an annual CPI increase closer to 2%. The data showing twice as much price inflation limits the size of upcoming rate cuts. It is doubtful that the Fed will keep rates the same at the next meeting in mid-March.

Oil prices are now up above $100 per barrel, starting yesterday.  The average weekly earnings of workers fell by 0.5%, which indicates that income is not adjusting to inflation. That is bad news.

Housing starts increased slightly by a very modest 0.8%. Investors were hoping for a larger number here.

The news is not encouraging in terms of consumer spending. With prices rising and income staying the same or getting lower, consumer confidence is likely to continue to falter. Future rate cuts have to be done with extreme caution. The Fed has a difficult decision to make next month with slowing economic growth and inflation problems to consider.

The European Central Bank policy maker Christian Noyer commented that the economic growth seems to be weaker than anticipated, after the euro declined against 11 major currencies.  Interest rate cuts by the ECB are becoming a possibility.

The euro has reached the lowest mark in two weeks, dropping 0.3% against the dollar making it now $1.4638.  The euro fell against the yen as well.  The yen traded at 158.27 up from 158.25.  The yen fell against the dollar to 108.12.

The pound is also losing power as well.  The pound is down to $1.9516 from $1.9612.

President’s Day made for a low trade volume today.  Markets in the U.S. are closed for the holiday.  Thin trading is expected today, and some expect exaggerated market moves.

Experts say that the strengthening of the dollar due to the slipping European currencies is only temporary.  Bernanke signaled the possibility of further rate cuts in his testimony last week.  Economic reports last week showed that consumer confidence is declining and regional manufacturing activity in New York slowed last month.  Bernanke is calling the current economic conditions “downside risks.”

If recession is not yet official, the United States is certainly very close to recession.  There is little positive data to indicate that the economy is on it way up as of late. Consumers have to spend in order to give a god boost to the economy.  The hopes of that happening in a significant enough way are pretty grim.  The reports from last week confirm that people are trying to hang on to their money and too many people are in overwhelming debt.

The euro’s decline signals possible evidence that the poor conditions of the U.S. economic are making a global impact.  The Federal Reserve is closely linked to the ECB, although their approaches to monetary policy have differed.  The ECB may have no choice but to begin reducing rates, which is something that they have avoided for years.  There is little evidence to deny that the U.S. Federal Reserve will cut rates further at the next meeting.

As for the dollar gaining strength, that might be temporary.