Ethan Harris
Ethan Harris
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We've gone from a period where there was a reasonable chance the Fed might cut rates just four months ago to one in which the Fed is very much comfortably just sitting on hold for now.
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That's the big lingering risk factor sitting out there on the horizon. Will we have a gradual adjustment, where the trade deficit gradually improves, or will we have an accident along the way?
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I think that (high inflation readings) would be almost the last straw to convince the Fed.
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Imagine you're a bank. The corporate sector isn't interested in borrowing, so you can't lend to it. So where do you go? Well, mortgages. They pay a reasonable rate. They're seen as a safe investment. Load up on mortgage-backed securities.
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It generally just adds to the case for investors taking a little more cautious view on risk and demanding higher returns on investments.
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There is a history both in appointments under the Bush administration and the Fed chairmanship itself of people off the list being picked. Bush does seem to have a proclivity to pick people with a more business background for his economic positions.
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We've been trying to see whether the improvement of the economy and financial market will carry the day in terms of consumer confidence, or if worries about labor will dominate. It looks like the 'glass-half-full' view is winning.
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People will wake up and realize the war on terror has just moved one step forward,
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Only with very weak U.S. growth or a major drop in the U.S. dollar will the trade deficit improve on a sustained basis. The reason you need these dramatic movements is that the U.S. has, according to almost every study, an incredible appetite for imports.
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If we have an economy that functions O.K., with a little help from the Fed, in that case gridlock is quite good for the market,
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I think the economy is already in the process of slowing to a more moderate pace. Oil has both an immediate impact on spending and lagging impacts. Even though oil has stabilized in recent weeks, we still have to play out effects. We're still waiting for the shock value of the winter heating bills hitting people.
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It is gradual step towards a little more flexibility. Inflation, the economy and the markets will dictate how much further they go. They say the economy is strong and that inflation risks are tilted a little to the upside. There is nothing yet in the data that will stop the Fed.
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I think we know corporate profit growth can't stay at the rate we've seen in recent quarters. They (employers) have been squeezing the work force pretty aggressively, squeezing productivity out of workers and holding the line on wages. It's a matter of how much corporate profits slow down.
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I think what people will see is that commentary from Fed officials will sound almost identical to their commentary prior to this meeting. Nothing's really changed at the Fed.