Robert, don't you just hate things like this. Good 'ol Bush seems to be doing several things right. 
Surprising US economic strength to keep Fed on hold
2007-01-28 04:16:55.0
WASHINGTON (AFX) - After a surprising show of strength in the US economy, the Federal Reserve is likely to keep interest rates steady at its upcoming monetary policy meeting to see if the trend continues, analysts say.
The Federal Open Market Committee, which meets Wednesday, is widely expected to keep its base rate at 5.25 pct, where it has been since August, when the panel halted a series of 17 consecutive quarter-point increases to stem inflation.
In addition, the central bank is likely to maintain its warning or "bias" toward another rate increase, which analysts say is aimed at keeping inflation expectations in check.
While most Fed-watchers see no change in the funds rate Wednesday, more significant will be the statement on the panel's assessment of economic conditions, which will provide clues on the Fed's next move.
Stronger-than-expected data has eased concerns that the economy might slip into recession. At the same time, it has diminished prospects for a rate cut that might be needed to stimulate activity, say economists.
"The problem for the Fed is that the FOMC meets (this) week and they have these strong housing data and even better general economic numbers to contend with," said Joel Naroff of Naroff Economic Advisors. "The slowdown they had been pointing to is no longer there."
John Lonski, chief economist at Moody's Investors Service, said the Fed is starting to come to grips with a stronger economy.
"If anything, the likelihood of a change in Fed policy is now shifting from a rate cut to a rate increase," Lonski said.
Even though the labor market is tightening and boosting wage inflation pressures, Lonski said that "the idea of a rate hike cannot be taken seriously until the uncertainties surrounding housing have been sufficiently resolved."
In the past few weeks, even the most bearish analysts have been upgrading their forecasts from a gloomy outlook to one that shows steady and moderate growth for the fourth quarter of 2006 and early 2007.
Data in the past few weeks showed US employers added a healthy 167,000 new jobs in December, while the housing market, the main source of economic weakness, appears to have stabilized.
New home sales rose 4.8 pct in December, defying expectations of weakness and US home resales slipped 0.8 pct, leading some economists to suggests that the worst of the housing slump is over.
Deutsche Bank chief US economist Joseph LaVorgna, who a month ago had projected zero growth in the fourth quarter, is now considerably more optimistic.
LaVorgna now sees fourth-quarter growth at a 2.3 pct annualized pace and a 1.8 pct expansion in the first quarter of 2007.
"Since early December nearly every one of the major monthly economic indicators that we track was stronger than expected," he said.
Lavorgna said he still believes the Fed will cut rates, but later than he had earlier predicted and not as much.
"We have pushed our forecast for the timing of the Fed's first rate cut to the second half this year," he said. "As a result, we now see the Fed cutting rates only 50 basis points, not the 100 basis points we had thought before, when the economy looked like it was ready to crack."
Other analysts say the economy is even stronger, and that the Fed may have to consider hiking rates instead of lowering them.
Citigroup chief economist Lewis Alexander sees overall economic growth for 2007 at 3.1 pct.
"Despite the crash in housing, the US economy overall remains set for a soft landing, with average growth in the 3.0 to 3.5 range in 2007," he said.
"Corporate finances overall are in good shape, financial conditions are slightly accommodative, job growth remains healthy, and lower oil prices are lifting real incomes. Second, housing demand already shows signs that the worst of the downturn has passed and the imbalance between demand and supply is starting to ease."
Beata Caranci, senior economist at TD Bank Financial Group, said she sees the Fed holding rates steady for an extended period.
She said consumer spending remains strong, keeping growth on track despite weakness in housing.
"Consumer spending growth will remain partially shielded from deteriorating wealth effects, and the economy will track a reasonably healthy, but still subpar 2.5 to 3.0 pct quarterly pace, before accelerating into 2008," Caranci said.
"In this environment, the Fed is unlikely to feel any urgency to cut rates."
Lee