SO, WHAT IS THE FED
GOING TO DO?
Welcome to the month of May! And with it comes another meeting of the Federal Open Market Committee. The Federal Open Market Committee, you recall, is the committee that sets interest rate policies for the Fed, and meets roughly every six weeks throughout the year. There was no meeting last month, and this month the meeting occurs on May 16th. Everyone keeps hoping that sooner or later the Fed will stop raising interest rates, fearing that if they continue the raising of rates, it will eventually hurt the economy. So far, as we have noted, the Fed's five increases in interest rates, going back to last June, for a total of 1¼ points, really has done little or nothing to slow the economy down. Complicating everything is the fact that this is a national election year, and the Fed Chairman is a Republican. Generally, the Fed would like to stay out of the election controversy.
So, the feeling goes, that if the Fed continues tapping on the brakes and finally does slow the economy, if the economy slows too much too quickly, it could effect the November election, and would probably hurt the party currently in power in the White House, and that, of course, would be the Democrats. So, as stated above, the feeling is that Republican Alan Greenspan would not like to have his Fed accused of costing Democrat Al Gore the presidency in the fall. Well, that might be an interesting theory, but the facts don't necessarily support it. In fact, many analysts feel that this year's march to the White House will not force the Fed off its own path of monetary policy. Most analysts honestly believe that the Fed will do what it deems fit in the overall interest of the economy. Still, myths abound that the Fed takes the sideline during election years.
However, historical evidence indicates that this "conventional wisdom" is wrong. In fact, over the last 30 years, the Fed has altered its interest rate policy on average of eight times during election years, and on average only about seven and one quarter times during non-election years. In that period of time, according to a study done by Goldman Sachs, the Fed was also more likely to raise rates during election years rather than lower them, by a margin of five to four.
At least, at present and even by historical standards, it can be expected that the Fed will, if it sees fit, continue to raise rates, in this coming May and perhaps again near the end of June, when the next meeting after the mid-May meeting occurs. Following the end of June meeting, there are still four more Fed meetings, although only two of them, on August 22nd and October 3rd, could possibly influence the election, since the last two occur after the election, on November 15th and on December 19th.
A recent Bridge News survey of 21 analysts is still forecasting a Fed increase of an additional three-quarters of a point this year, and since Mr. Greenspan is a known gradualist, it is assumed that that would be three quarter-point interest rate increases, meaning that the Fed will be at work at least until almost the end of August.
The big trouble with the Fed's trying to control the economy is that most experts say it will take anywhere from 12-18 months for higher interest rates to really effect the economy. Since the Fed started last June we still haven't entered into the period where interest rates really start to bite. Now, what the Fed has to watch very carefully is if we are about to approach the period where higher rates take hold, will they cumulatively wind up slowing the economy too much and throwing us into a recession? A couple of things seem fairly certain. Number one, the economy hasn't slowed; number two, the Fed seems determined to slow it; number three, preferences notwithstanding, the Fed will do what it deems necessary; and number four, our economy, like an aircraft carrier, maneuvers slowly, not quickly like a speedboat, and that makes the Fed's job tricky, to say the least.
(Tom Butenhoff is a First Vice President with J. E.
Liss & Company in Milwaukee. The views are his and not necessarily
those of Liss Financial Services or the Job Connection/Hiring
Network.)