When it comes to telling facts forthrightly, members of the Federal Reserve don’t always rate high with Americans. Under former chairman Alan Greenspan, the central bank was widely identified with Fedspeak, a way of offering only dimly perceived clues about where monetary policy might be headed.
No sooner had Ben Bernanke ascended to the top spot than the old problem resurfaced anew. In recent days, his comments about financial markets misinterpreting his intentions did the inevitable – roiled stocks and bonds, as traders tried to read the tea leaves.
The next step comes Wednesday, when members of the Fed’s policymaking Open Market Committee end a two-day meeting. There are widespread expectations that they will pull the trigger on interest rates for a 16th time in less than two years, raising their short-term benchmark to a flat 5 percent.
Chicago banker Kenneth Skopec, however, says “the outcome is no sure thing. It is touch and go whether the Fed will act, because there are widespread uncertainties in the economy.”
In any event, after the central bank makes its decision on Wednesday, there will be a pause in its campaign to tighten credit, says Skopec, of MB Financial Inc.
Among problems facing the economy, according to Skopec, are not only high fuel and commodity prices, but also trillions of dollars in mortgages that are rapidly coming due – at higher interest rates.
“There is a lot of unrest among the American people, for a variety of reasons,” Skopec said, “and the Fed will be smart to go to neutral for awhile.”
Gloomsayers point to debt-laden consumers as the economy’s weak link, saying that spending inevitably will flatten or fall. Their concerns: gasoline topping $3 a gallon and rising rates that make it riskier to borrow against the old homestead.
Chicago economist William Hummer expects Thursday’s report on April retail sales to show a gain of 0.7 percent, on top of a 0.6 percent advance a month earlier.
Consumers are able to shrug off fears about gasoline and interest rates for three key reasons, said Hummer, of Wayne Hummer Investments:
“Employment is firming, personal income is rising and confidence is building. Besides, consumers are aware that the economy has expanded for the last 23 years, with only two mild downturns.”
The stock market is dealing with long-held fears that May creates a jinx for equities. However, since the beginning of this month, stocks have zoomed to six-year highs, with the Dow Jones transportation index, consisting mainly of truckers and railroads, achieving records.
With first-quarter corporate profit reports largely out of the way, Wall Street seems to be in a honeymoon phase. The only possible rain on the parade: some unexpectedly tough commentary from the Fed.
(c) 2006, Chicago Tribune.
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