Thursday, 8 September 2005

More interest rate hikes despite Katrina

Yesterday, Reuters reported a number of stories that collectively suggest that, Hurricane Katrina notwithstanding, it looks like the Federal Reserve will continue to raise rates.

The report mentions the Congressional Budget Office's warning on the storm's impact on US GDP.

The CBO said devastation from the hurricane, which ravaged the Gulf Coast and sent gasoline prices soaring, could trim growth in the second half of 2005 by between 0.5 and 1 percentage point and cut employment by 400,000.

It saw both growth and employment rebounding in the first half of next year as the region rebuilds.

The impact on retail sales so far, however, is not clear.

Redbook Research said sales at major retailers in September to date were up 0.2 percent compared with the same span in August and were 3.0 percent on a year-over-year basis for the week ending September 3.

The International Council of Shopping Centers and UBS said that chain store sales were flat last week after dipping 0.3 percent the prior week. Compared with the same week a year ago, sales were up 3.8 percent following a 3.9 percent increase a week earlier.

Other news yesterday tilt the balance towards further rate hikes, for example, the data on productivity and labour costs.

[S]econd-quarter productivity growth was revised to a lower rate, weakening U.S. Treasury bond prices. Investors fear this could fuel inflation and prompt the Federal Reserve to keep raising interest rates despite Katrina's harm...

Growth in output per worker hour in the nonfarm business sector slowed to a 1.8 percent annual rate from the 2.2 percent pace initially reported and the first quarter's 3.2 percent growth pace, Labor Department data showed. Unit labor costs...grew at a 2.5 percent pace versus a 1.3 percent rate initially reported and forecasts for a 1.4 percent gain.

The report also touched on the Federal Reserve's Beige Book:

The Fed...said business activity had picked up cross the country from July through to mid-August. But this assessment, in its regular beige book assessment of the economy by the Fed's 12 regional banks, was based on data culled before Katrina hit.

And perhaps most significant were the comments from Chicago Federal Reserve Bank chief Michael Moskow, more of which were reported here.

The Federal Reserve needs an "appropriate" monetary policy to keep inflation contained at a time the economy has less slack than a year ago, Chicago Fed President Michael Moskow said on Wednesday, hinting at more rate increases ahead.

"I'm concerned about core inflation running at the upper end of the range that I feel is consistent with price stability," Moskow said in a speech to the Futures Industry Association, echoing hawkish comments he made Aug. 24.

Certainly, other central banks have not been afraid to raise rates. The Bank of Canada raised rates yesterday, as did the Bank of Thailand. The Reserve Bank of Australia, though, left interest rates unchanged.

There were data yesterday suggesting that there is enough momentum in the global economy to withstand further rate hikes. For example, German industrial production rose 1.2 percent in July, the third month in four that it has increased. Australia's GDP grew a faster-than-expected 1.3 percent in the second quarter, the fastest pace since the fourth quarter of 2003. And Britain's house prices rose at their fastest rate in almost a year in August as soon as the Bank of England cut interest rates.

However, it is not all clear for the global economy. Japan's recent weakening trend appears to be reinforced by the latest report that its diffusion index of leading economic indicators fell to a break-even 50.0 in July from 66.7 in June.

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