Wednesday, August 02, 2006

Will the Fed Raise Interest Rates Next Week?

Our monthly survey of supply managers and business leaders in the 9-state Mid-American region and the 3-state Mountain States region show that inflationary pressures at the wholesale level remain stubbornly high. Our July prices-paid index at 82.2, along with comments from survey participants, point to real concerns regarding inflationary pressures at the wholesale level,

Our report was carried by news outlets across the globe from Utah,1249,640199281,00.html

to the United Kingdom

The national numbers which were also released this week support our survey findings.

However, we are seeing the first signs that the Fed rate hikes may be bringing the economy in for a "soft landing." This is a rate of growth that is not so strong as to generate excessive inflationary pressures, but not so weak that job growth turns negative.

As a result our suvey results and other government data, I expect the Fed to forego a rate increase at its Aug. 8 meeting, but that will depend heavily on the U.S. Bureau of Labor Statistics’ employment report to be released this Friday. If the economy added more than 200,000 jobs in July, I expect a rate hike of 25 basis points (.25 percent). Anything below 125,000 will cause the Fed to leave the funds rate at its current 5.25 percent, its highest level since February 2001.

Supply managers and business leaders in the region noted that fuel prices are causing a drag on the economy, with many reporting added fuel charges for supplies and raw-material deliveries. Higher fuel prices aren’t the only energy woe. Hot weather in the nine-state region and across the country means electricity costs are rising as many businesses struggle to stay cool in this unusually hot summer. Other weather-related factors included a power outage in the St. Louis area. Gordon Gosh, vice president of the National Association of Purchasing Management-St. Louis, said, “The severe windstorm that struck the St. Louis area in July shutting down several businesses for four or five days was a major economic hit. The loss of wages, food products and sales was costly.”

So for all you investors out there, watch for a potentially large swing in values this Friday shortly after the market opens at 9:30 am (EDT) and just after the U.S. Bureau of Labor Statistics releases its employment report at 8:00 am (EDT)


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