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End to Fed Rate Hikes in Sight? MoneyNews (Headlines - scroll down for full stories)
In the surest "sure thing" since Secretariat at the Kentucky Derby, the Federal Reserve hiked a key interest rate one-quarter of a point yesterday. More ominously, the Fed sent some signals they weren't done raising rates yet, a notion that depressed investors and sent the stock market into a downward spin. The rate hike in the benchmark federal funds rate to 4.75% is the fifteenth increase in a row. The Fed funds rate is a key determinant by which banks and other lenders set loan rates on everything from cars to new homes.
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Somewhat surprisingly, the Fed left little doubt that they weren't done with the rate hikes. In a statement released by the agency, it seemed to assure future rate increases. "Some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance," the central bank's policy-makers said in their statement. As CNNMoney notes, those words alone propelled shares straight out of black territory. "The news sent stocks, which were trading modestly higher before the announcement, into the red," said CNN. "Bond prices tumbled, pushing the yield on the 10-year Treasury up to 4.78%. Bond prices and yields move in the opposite direction." Overall, the Dow Jones Industrial Average fell 95.57 points to 11,154.54. What it boils down to, market-watchers say, is not that Wall Street was surprised about the rate hike - but investors were disappointed that the Fed seems to be set to raise rates a record 16 times in a row. "Stopping at this point is off the table unless there is some unexpected piece of news like a sudden collapse in the housing market," Oscar Gonzalez, an economist with John Hancock Financial Services, told CNNMoney. But Andrew Wilkinson, chief financial analyst at MoneyNews, insists that investors need not switch to gloom-and-doom mode just yet. "Should equity investors feel as negative, as Tuesday's sell-off in stocks implies? I honestly don't think they should. First of all, the markets have been on a tear recently. It wouldn't surprise me to find that traders were forced into locking in recent gains as the market slid today. "Second, the continued 'hawkish' tone at the Fed - and by this I mean that they are prepared to act over inflation - is indicative of a vigorous economy. Third, it looks like earnings growth in the first quarter is set to deliver 11.8% growth in spite of the headwinds of rising rates and high energy prices, according to Thompson Financial, which closely monitors earnings trends." But Chris Probyn, chief economist with State Street Global Advisors, added that inflation remains a real hobgoblin in the minds of the Fed's Open Market Committee. He said "ongoing productivity gains have helped to hold the growth of unit labor costs in check" but also added that "possible increases in resource utilization" could lead to more inflation. The Fed did say that inflation expectations remain contained but added that recent increases in the price of oil and other commodities "have the potential to add to inflation pressures." Bernanke and Co. also feel that even though economic growth "rebounded strongly in the current quarter" the economy "appears likely to moderate to a more sustainable pace." In an op-ed article today, Bloomberg's John M. Berry noted that the Fed's rate rise served to "set itself up for one more increase and then a pause" and "disappoint analysts who expected Bernanke to make some immediate sweeping changes at his first Federal Open Market Committee meeting since replacing Alan Greenspan on Feb. 1." He also feels that most analysts seem to have misinterpreted the Fed's maneuver by failing to realize that the organization is merely reacting to data and will continue to do so. "The FOMC under Bernanke, just as under Greenspan, is going to be operating on the basis of a forecast - or perhaps a collection of forecasts - while recognizing just how unreliable they can be," says Berry. "They aren't going to make decisions on the basis of what happened last month or last quarter, unless that data changes their perception of what is likely to happen in the future." At 4.75%, the federal funds rate is now the highest it's been since 2001. In 2003, the FOMC had dropped the Fed funds rate to a four-decade low of 1% as insurance against deflation. Editor's Note:
2. Fed Throws out M3 Last week, the Federal Reserve stopped collecting data on the broadest measure of the money supply, M3, reports The Economist magazine. According to a press release from the Fed: "M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits." But The Economist argues that M3 does have a role to play. Though it agrees that most of the time M3 and M2 move together, there have been significant occasions when this has not been the case. "During the late 1990s equity bubble, for example, M3 grew faster," says the magazine. "Over the past year, M3 has grown nearly twice as fast as M2." The Economist calls the Fed's assertion that M3 is insignificant "odd to claim," instead concluding that money supply just isn't important to the Fed when it comes to monetary policy. However, The Economist warns that the Fed is ignoring money supply at its own peril. "Many big mistakes in economic history were made when policymakers ignored monetary signals: the Great Depression in the 1930s, the great inflation of the 1970s and the financial bubbles in Japan in the late 1980s and East Asia in the late 1990s," claims the magazine. It also cites research from the Bank of International Settlements as saying that "rapid growth in money and credit, as well as asset prices, usually signals the build-up of economic imbalances, which often cause financial stress later on." Unlike the Fed, other central banks (such as the European Central Bank and the Bank of Japan) factor in money supply when deciding on their monetary policy. These institutions use the aggregate money supply data as a long-term indicator of economic health. Perhaps the Fed's disregard of money supply is the reason it frequently comes under fire for not acting quickly enough and then reacting too harshly to combat inflation. Is the current behavior of M3 a sign of underlying economic sickness that the Fed is ignoring? Only time will tell. And by then, all information on M3 will have been wiped off the record books. Editor's Note:
3. Consumers Bullish on Economy Shaking off the Fed rate hike, consumers are growing increasingly optimistic about the U.S. economy. The Conference Board released its latest consumer survey showing that its index rose 4.5% to 107.2, the highest figure in four years, the Board says. Analysts had anticipated that the index would clock in at 102. The new figure is up from a revised 102.7 in February. "The improvement in consumers' assessment of present-day conditions is yet another sign that the economy gained steam in early 2006," Lynn Franco, director of The Conference Board Consumer Research Center, said in a statement. "Consumer expectations, while improved, remain subdued and still suggest a cooling in activity in the latter half of this year." Retailers in particular might be popping open the champagne over this news, as their sector typically counts on a strong spring buying season to set the tone for the year. Now that kind of performance might be a reality. But from the stock market's point of view, the consumer news was muted by the Fed's decision to hike interest rates and likely raise them again in May. "Despite the improvement in consumer confidence, a modest stock market rally evaporated after the Federal Reserve raised a key interest rate by a quarter percentage point on Tuesday afternoon and left the door open for further rate hikes," reports the Associated Press. "The new level of 4.75% in the federal funds rate is the highest in five years and will likely lead to higher consumer borrowing costs." With the housing market cooling and the job market heating up, nobody could blame consumers for being uncertain about the economy. But apparently the good news on employment has carried the day. "It is encouraging that consumers are taking the negative things that are happening recently," Gary Thayer, chief economist at A.G. Edward & Sons Inc., told the AP. "Possibly the employment situation is outweighing other concerns." "If the job market remains good, I think consumer spending will be healthy," he said. Nonetheless, Thayer believes that a sharp downturn in the housing market could sour confidence. One trend that does seem to concern U.S. consumers is the new global economy - particularly America's role in it, compared to up-and-comers like China. And there is good reason to be worried.
China has become the world's third-largest economy, and American companies are falling behind in the race to capitalize on the growing purchasing power of the Chinese middle class, said Kau C. Pang, M.B.A., an international business expert at the UAB School of Business. This week MoneyNews reported on 8% to 10% annual growth in China's economy, which is expected to continue unabated. "Moving from an export-driven economy to a more domestic-consumption economy is creating a huge market for goods and services, including infrastructures, health care, technology, education, real estate, raw materials and more. The EU, Japan and Korea are pursuing China very aggressively." Editor's Note:
4. How Many Millionaires Live in Your County? TNS Financial Services, one of the world's largest market information companies, released its list of the top 10 wealthiest counties in the U.S. The Affluent Market Research Program (AMRP), an annual survey of wealthy U.S. households published by TNS, identifies the ten counties across America with the highest number of millionaire residents - including Los Angeles County, California (home to Hollywood heavyweights such as Steven Spielberg and Barbra Streisand), and Palm Beach County, Florida, home of Donald Trump's famed Mar-a-Lago estate.
The median age for the head of the millionaire household is 58 years old, and almost 45% are retired. Approximately 19% own or share ownership of a professional practice or privately held business. Nearly 60% of millionaire households obtain investment advice from a professional adviser, and over 73% prefer to do business at a single institution that brings together targeted specialists and services. When respondents were asked to identify their single most important financial goal, the leading response was "to assure a comfortable standard of living during retirement." Less important financial goals on the list included leaving an estate for heirs, protecting their estate from taxes, minimizing income and capital-gains taxes, improving household liquidity and charitable giving. And the number of U.S. millionaire households is on the rise. According to the survey, the number of households with more than $1 million in net worth (excluding primary residence) rose in 2005 for the third consecutive year. This increase is due to long-term wealth accumulation - not new wealth creation or real estate investments. While real estate continues to be an investment-portfolio staple, it is not the sole generator of wealth. Some 46% of millionaire households own investment real estate, such as a second or third home, rental properties and undeveloped land. About 34% have a first mortgage on these residences while 25% have second mortgages on these additional residences. "With the increasing number of millionaire households comes an increasing confidence, as over three-quarters of high-net-worth households feel they will be financially prepared for retirement," said Jeanette Luhr, manager of the research study. "These millionaire households understand that calculated risks are still a necessity within their portfolio design. However, over 50% have become much more conservative in their investment approach over the past year."
These millionaires have been able to capitalize on their measured planning and active reinvestment to take advantage of economic changes over the past several years, such as the decrease in the average debt. An estimated 70% of millionaire households own investments in stocks and bonds, while 68% hold mutual funds and 58% have regular or Roth IRAs. Editor's Note:
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