Momentum mounts to reverse rising rates
Alan Greenspan's plate is getting rather full. In addition to factoring in rising oil prices and the destructive impact of Hurricane Katrina, the Federal Reserve chairman now has to take note of the terrible numbers in today's report from Chicago purchasing managers.
For the first time in 27 months, the index fell below 50, a key benchmark that suggests a weakening economy. Will the Federal Reserve keep raising short-term interest rates despite some worrisome economic signs?
"I am sure there are at least a few members of the Fed wondering if they should pause at this point, remembering August of 2000 when the index fell below 50," says economist Brian Wesbury, chief strategist at Claymore Advisors.
In 2000–when a number of economic indicators began to presage the forthcoming recession–the Fed kept short-term rates steady until November, when it cut both the federal funds rate and the discount rate. Four months later, the economy tipped into recession. But this time, Wesbury thinks the Fed may keep raising rates, given the overall continued strength of the economy.
"This is a serious warning sign, but more likely an aberration than the real thing," he predicts. More signs for the Fed to ponder come Thursday, when a slew of economic reports are scheduled to be released, including nonfarm payrolls and the Institute of Supply Management's report of national purchasing managers.
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