''Midas'' commentary for April 3 posted in the clear at Gold-Eagle

Section:

The Fed is back on deck

By Rex Nutting
CBS.MarketWatch.com
Friday, April 2, 2004

http://cbs.marketwatch.com/news/story.asp?guid=%7BF8F5289E%2D4A22%
2D4FAC%2D93BD%2DBC6AC42676A1%7D&siteid=mktw

WASHINGTON -- There won't be much economic data
released in the coming week to distract investors from
what's suddenly important again: the Federal Reserve.

The surprisingly strong payroll numbers for March and
the disturbing signs of pipeline inflation in February
have put the Fed back in the spotlight.

Financial markets are now pricing in two rate hikes by
the end of the year and economists are starting to talk
seriously about higher rates as soon as summertime.
Interest rates spiked higher on Friday. But what do
Fed officials think?

Speeches by two key Fed policymakers could be the
top headlines in an otherwise light week for the data.

Fed officials have laid out two conditions that must be
met before rates can be nudged off their 46-year lows
of 1 percent: 1) Sustainable job growth that reduces
the slack in the economy, and 2) stabilization in
inflation rates.

Some argue that the data in the past week (along with
signs that consumer inflation has also bottomed) fulfilled
both requirements.

"We think core inflation has stabilized and is edging
higher and we see this [jobs] report as the beginning
of robust job creation," said John Ryding, chief market
economist for Bear Stearns, in a research note. Ryding
has a rate hike penciled in for the August meeting.

"This type of job growth, along with evidence that core
consumer price inflation is accelerating from its low of
around 1 percent, will support our forecast of a 25-basis
point hike in the Fed funds rate at the Aug. 10 FOMC
meeting, followed by another 25-basis point hike in either
November or December," said Stuart Hoffman, chief
economist for PNC.

Others say things are getting better, but not so good
that the Fed will rush

"In our judgment, that timetable is out of step with the
underlying message of today's data and it's out of step
with the theme of patiently withdrawing accommodation
highlighted again in speeches this week," said Robert
DiClemente, an economist for Citigroup Capital Markets.

"The slack in the labor market that the Fed wants to see
disappear so it can get on with raising interest rates is
occurring ... at about 45,000 a month rate," said David
Gilmore, an analyst for FX Analytics. "In other words, at
the margin. Fed officials need to see much more evidence
in the payroll data before justifying a rate hike."

The debate on the outside mirrors one going on inside the
Fed itself.

"Two camps are emerging, with sharply demarcated sets
of perspectives, despite an agreement that the U.S.
economy is on the mend," said Avery Shenfeld, an economist
for CIBC WorldMarkets.

On one side, Richmond Fed President Alfred Broaddus, Fed
Govs. Ben Bernanke, Donald Kohn, and the big guy, Alan
Greenspan, who have been counseling patience. They'd like
to see a little more inflation to guard against the trap of
deflation. With inflation so low, there's little cost to
letting the economy run a bit faster than its potential for
a while.

And that means keeping rates low for a while longer.

"The true doves on the Fed aren't going to be too impressed
by a single number after such a long stretch of
disappointment," Shenfeld said of the 308,000 jobs created
in March.

Fed Vice President Roger Ferguson will speak on the
economic outlook on Thursday. It'll be Ferguson's first
public comment on the economy since early January. Ferguson
is considered to be closely aligned with Greenspan's views,
although he's not as close as Kohn, who has given very
dovish speeches the last two weeks.

On the other side, we have St. Louis Fed President William
Poole, Atlanta Fed President Jack Guynn, and perhaps a
few others who will make their views known in the coming
weeks and months.

Poole will speak on inflation on Tuesday. Last week Poole
warned that the Fed shouldn't let rates stay low "beyond
their time," a signal that Poole believes the Fed should be
aggressively pre-emptive against inflation.

Shenfeld says the first rate hike won't come before
December. "The doves are likely going to have enough
clout to keep rate hikes at bay for at least a couple of
FOMC meetings," he said.

But the hawks like Poole will be able to exact some
concessions in the name of consensus on the board.
"We could soon lose the promise to be 'patient,'"
Shenfeld said.

The Institute for Supply Management releases its
March nonmanufacturing index on Monday. This release
doesn't have the history of the ISM manufacturing index,
so investors often ignore it.

Economists are looking for the ISM to rise to 61.2
percent in March from 60.8 percent in February.
Anything over 50 percent is good and anything over
60 percent is stellar.

On Thursday, the Labor Department will release the
weekly jobless claims data. Initial claims have slowly
declined over the first three months of the year to a level
that's just OK, around 340,000 a week. Most economists
expect more gradual improvement in the coming months.

At some point, the Labor Department will start releasing
its producer price indexes on time. The March index was
scheduled for release on Thursday, but the department
has postponed the data indefinitely. There's a chance it'll
come this week. At this point, economists are predicting
the PPI will jump 0.5 percent, with a 0.2 percent gain in
the core PPI.

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