Tomorrow the Federal Reserve Open Market Committee meets to assess the status of the economy and decide whether economic conditions call for any change in the Fed's policy on short-term interest rates. The Fed will be primarily interested in assessing the current and future status of inflation and economic activity.
Let's take a look back over the economic news reports since the first of the month and see if we can guess what the Fed is going to do.
May 16: Reports by the Commerce Department and the National Association of Home Builders indicate that new home sales are picking up -- a sign of a pick up in economic activity.
May 16: The four-week moving average of new claims for unemployment insurance has been trending down for several weeks and, just recently, the year-over-year change in this indicator turned positive -- another sign of increased economic strength.
May 15: The year-over-year change in the Federal Reserve's Index of Industrial Production has been gradually expanding in the past few months.
May 14: The year-to-year change in the Consumer Price Index has varied between 2.5 percent and 3.5 percent during the past two years. For the twelve months ending in April, the rate was right in the middle of that range, at 2.9 percent.
May 14: Real average weekly earnings of nonfarm workers, an indicator of wage inflation, fell by 0.4 percent in April -- the fifth drop in six months.
May 14: Total retail sales grew by 6.0 (+/-2.0) percent between April of 1995 and April of 1996.
May 10: During 1995, and thus far during 1996, the Producer Price Index grew at an annualized rate of just 2.3 percent
May 8: The Composite Index of Coincident Economic Indicators has been rising slowly, but steadily, since July of 1995.
May 3: The most-recent report by the Columbia University Center for International Business Cycle Research (CIBCR) on its Leading Inflation Index showed a slight uptick. But, the direction of the trend in this index is still down. This index is reportedly a favorite of Fed Chairman Greenspan. It is supposed to have a lead time of about six months.
May 2: The Commerce Department's initial estimate of the change in Gross Domestic Product for the first quarter was +2.8 percent. By Commerce's own admission, this number could be as low as +1.7 percent when all of the source data finally comes in. Still and all, this worst-case possibility is still a positive number. So, we can be certain that we had growth in the economy during the first quarter. And, 1.7 percent sure beats the heck out of the 0.5 growth rate we had in the fourth quarter of 1995.
The price index for gross domestic purchases, an indicator of inflation, increased just 2.5 percent during the first quarter, right in line with the 2.5 percent average for the price index during the preceding four quarters.
May 1: The National Association of Purchasing Management (NAPM) reported that the April value of its Purchasing Managers Index (PMI) jumped to 50.1, the first reading above 50 in nine months. While this reading was a marked improvement over recent months it indicated that economic activity in the manufacturing sector of the economy was just barely better than at a standstill. This same report showed that the NAPM's prices paid index was still in the downtrend begun 16 months earlier.
Tallying up these reports, we have seven stories about mostly-modest economic growth and six stories about a low and stable rate of inflation.
So, how will the Fed react to this? I believe that they will decide that the slowly improving economy will require no further stimulus in the form of lower interest rates. At the same time, they will decide that the well-controlled inflation environment precludes the need for raising interest rates.
In other words, the Fed will do nothing.
Byline: Lafferty (MF Merlin)