Wise words... see this, if only the Fed officials were honest
Fed Is Expected to Raise a Rate on Tuesday
Associated Press
Many indicators suggest that economic growth slowed sharply last quarter, particularly in June, and may continue to be sluggish for a few more months. Still, some economic sectors showed solid growth, and one ticket in the Texas lottery, above, brought its owner a record $145 million last month.
By EDMUND L. ANDREWS, NYTimes
Published: August 5, 2004
William Thomas Cain for The New York Times
The government reported Tuesday that personal income dropped 0.7 percent in June, which could affect retailers' bottom lines.
WASHINGTON, Aug. 4 - Despite a lull in economic growth and anxiety about the effect of high oil prices on spending, the Federal Reserve is expected to continue its strategy of gradually raising interest rates when policy makers meet next Tuesday. A raft of indicators suggest that economic growth slowed sharply last quarter, particularly in June, and may continue to be sluggish for a few more months. But Fed officials and many outside economists predict that the lull will be temporary and that activity will pick up again by the fall. On Wednesday, the Commerce Department released new data on orders for manufactured products that in many ways reinforced the signs of sluggish growth. But the economic picture is not clear and other indicators point to a renewed step-up in growth. Consumer confidence is back at high levels, and automobile sales last month jumped to an annual rate of 17.3 million cars and trucks from a rate of just over 15 million vehicles in June.
The most important evidence on the economy's recent pulse will be released at the end of this week. And while Fed officials will scrutinize that data on the job market's July performance, to be announced Friday by the Labor Department, most analysts believe central bankers are committed to raising the federal funds rate on overnight loans between banks by a quarter-point, from 1.25 to 1.5 percent.
Fed policy makers are scheduled to meet four times before the end of the year and unless the economy shows clear signs of further slowing, they are expected to keep raising rates at each of those sessions. And the process will probably not end there. "The ebb and the flow of data is less important than it would otherwise be,'' said Laurence H. Meyer, a former Fed governor. The main reason, he said, is that Fed officials know that short-term interest rates are still so far below normal - adjusting for inflation, they are actually negative - that they would eventually lead to rising prices if left unchanged. "It is almost as if you close your eyes,'' Mr. Meyer added, "until you get rates back up to about 2 percent.''
All of that leaves the Federal Reserve with almost the opposite challenge it faced just two months ago. Back then, Fed officials were fending off critics who complained that they were ignoring signs of looming inflation. Now officials are arguing that the recent deceleration in growth is temporary, too.
[b ]Alan Greenspan, the Fed chairman, went out of his way last month to brush off weak growth in jobs and consumer spending as a "soft patch'' that "should prove short-lived.''
Other Fed officials have echoed that view. "There is little indication that the labor market's progress is stalling,'' said Roger W. Ferguson, the central bank's vice chairman, in a speech on July 21. Anthony M. Santomero, president of the Federal Reserve Bank of Philadelphia, described the slower growth as "the usual fits and starts in a dynamic economy, not a significant change for the broad outlook.''
The latest statistics do not clarify the situation. The government reported Wednesday that orders for manufactured goods jumped 0.7 percent in June over the month before, a bigger jump than many economists had expected. But most of that jump came from a surge in military spending, and in particular from orders for military aircraft, which shot up 79.1 percent.
Excluding orders for military equipment, orders for durable goods were nearly flat in June. Orders for household appliances declined 7.4 percent, while those for nonmilitary communications gear dropped 7.9 percent and for computers dropped 1.7 percent.
Last week, the Commerce Department estimated that economic growth slowed to an annual rate of 3 percent in the second quarter of this year - a big drop from growth of 4.5 percent in the first three months of this year. On Tuesday, the government reported that personal income dropped 0.7 percent in June - and slightly more after accounting for inflation.
But business surveys consistently show that manufacturers and service companies alike are optimistic and gearing up to hire more people. New claims for unemployment benefits have been well below 400,000 a week for months, indicating that employment should continue to expand. "When you add it all up, the trajectory of the economy is healthy and I'm looking at an annualized growth rate of 3.5 percent for the second half of the year,'' said Mickey D. Levy, chief economist at Bank of America. That would be lower than most economists, including those at the Fed, had been predicting. But it would still be at or slightly above the United States' long-run growth rate.
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