ODDS FAVOR NO FED INCREASE
According to a recent poll by the Bridge News Survey, economists say the odds of the Federal Reserve Board raising interest rates at its next policy meeting on August 22nd have slipped to 45%. This is down from the 51% when the survey was taken in mid June, before the recently reported Consumer Price Index announcement.
While the survey generally showed economists seeing less chance of an August rate increase, many concede that they're just not so sure. Economists point out that there are still a number of key reports due in the weeks leading up to the next Fed meeting, making it premature at this point to rule out a rate hike next month. They do believe the Fed will continue to state that the risks are weighted toward an increase in inflationary pressures, thus keeping the markets alert for a possible future rate hike.
The Fed has, we know, raised interest rates six times over the past 13 months-- everybody is waiting for that point when they're finished with this particular cycle-- and it would be so much easier if Mr. Greespan did say it's finished. But the fact is, Alan Greenspan is never going to stand up and say, "We're done." He can't and won't; it would set off a fireworks display on Wall Street and Main Street that would make our Independence Day celebration look tame. The record of stock market increases following the ending of a Fed rate increase cycle is quite impressive. Caution aside, I think it's apparent that the cycle is over. The Standard and Poor's 500 shows an average 14% gain over the following six months and a 23% gain in the following 12 months.
Mr. Greenspan is trying to control the stock market, if you will, feeling that the "wealth effect" puts too much money into the system, and makes people generally feel too prosperous, adding fuel to an economy that in his opinion is still too strong.
There are signs everywhere that the economy is clearly starting to weaken; from housing to industrial production, and even in the labor force, the signs of slowing are just what the Fed wants. I think they've accomplished their goal, and hope the economy is now set for a soft landing, wherein we slow without slipping into a recession.
As far as our friend the stock market is concerned, my partners and I feel more comfortable with the second half of the year. Earnings season reports for the second quarter have begun in earnest. Chuck Hill, of earnings tracker "First Call," expects S&P 500 stocks to boost earnings 23.6% overall, with tech stocks posting a 37% growth vs. a year ago. There will probably continue to be dips and air pockets, but we think prices will generally be higher by yearend.
All this is based on the belief that the Fed is nearing an end to its rate increases, that the economy is beginning to slow, cooling any inflation fires that the Fed may still fear. In short, I guess you could say "In Greenspan we trust." We shall see.
Turning global for a moment, worldwide prosperity is spreading with some notable exceptions, but a new report indicates that the technological revolution we are undergoing may prove to be the cure. The report from the Institute for International Economics, says effective Internet and e-commerce policies can produce a long-term increase of 400 billion dollars in our Gross Domestic Product level. The study, entitled "Global Electronic Commerce," says that for the industrial world as a whole, the level of Gross Domestic Product could rise about 5% if the right policies were implemented. Significant changes in policies and economic environment could yield Gross Domestic Product increases of 100 billion dollars for developing countries in Asia, 45 billion in Latin America, and similar amounts in Africa
The report draws some interesting conclusions, saying that first, policy makers should harness their sense of urgency about e-commerce and privatization, deregulate and allow international participation in service sector infrastructures, long protected from innovation and competition by fearful governments. Second, governments should protect privacy and preserve and maximize private incentives to encourage innovation. Third, the private sector should play the major role in bridging the digital divide that is resulting from the uneven growth of e-commerce.
With cooperative governments, prosperity over the next 10 years could spread over the far reaches of the world to the places that have, as yet, remained untouched.
(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.)