August 11, 2004


'Bullish' Fed raises key interest rate (ERIC HERMAN, 8/11/04, Chicago Sun-Times)

In a vote of confidence for the still-struggling U.S. economy, the Federal Reserve raised the benchmark interest rate a quarter point Tuesday -- a move that boosted the stock market to its best performance in two months. [...]

During the 1990s, the stock market typically lost ground after Fed rate increases. But the Dow surged 130.01, or 1.3 percent, to 9,944.67 in Tuesday's trading. Since the Fed traditionally keeps interest rates low when the economy is weak, investors interpreted its move to mean the U.S. economy would continue to grow in spite of recent bad news.

While the Dow had its best performance since June 7, the other indexes also fared well. The Standard & Poor's 500 index rose 13.82, or 1.3 percent, to 1,079.04, while the Nasdaq composite index jumped 34.06, or 1.9 percent, to 1,808.70.

"The Fed remains pretty bullish on the outlook for the U.S. economy, and I think the intent was to reassure the public and investors that they feel the recovery is still on track," said Diane Swonk, chief economist at Bank One.

How many consecutive years of growth does an economy have to post before you stop saying it's struggling?

Posted by Orrin Judd at August 11, 2004 11:04 AM

OJ, the economy is still on stimulants. Greenspan is weaning the economy off a little at a time. Noone knows if it will be able to handle neutral interest rates.

Besides, last week you argued for leaving the rates as they were. How can you call the economy healthy and at the same time argue that it can't handle short term rates higher than 1.25%? Isn't that an admission of weakness?

Posted by: Robert Duquette at August 11, 2004 11:36 AM

The economy won't really get going again until there is a Democrat in the White House. It really is a very, simple explanation.

Posted by: Brandon at August 11, 2004 11:38 AM


The Fed caused the last two slowdowns fighting inflation that wasn't there. Real interest rates continue to be far too high given the deflationary epoch we've been in and will remain in for a few more decades.

Posted by: oj at August 11, 2004 11:40 AM

I think the Fed was right to raise rates - the market interpreted that as a sign of confidence. If the Fed had left rates unchanged the market probably would have tanked given how skittish it is.
To OJ's point the public, with help from the media, still thinks the economy is doing lousy. The economic numbers are actually better now than in 1996 when Clinton was easily reelected but polls show people think Kerry is better on the economy.

Posted by: AWW at August 11, 2004 12:03 PM

>How many consecutive years of growth does an
>economy have to post before you stop saying
>it's struggling?

Until the instant there's a Dem in the White House, of course.

Posted by: Ken at August 11, 2004 12:09 PM

There is no doubt that the economy is in a much more tenuous situation than the cheerleaders want to admit. The fiscal stimulus brought by tax cuts is wearing off, the Fed is determined to remove monetary stimulus as well, and high crude prices are having a ripple effect in the corporate sector, eroding confidence and preventing expansion plans from being implemented at just the time that they are needed to re-energize the consumer sector.

Also, if you look at the labor force participation rate and the size of the labor force, there are approximately 1.5MM people who are not even looking for jobs who should be. When you add them to the reported unemployment rate, the actual number is close to 7%, which is clearly still in "feels like a recession" territory.

Finally, absolute growth does not insure future expansion. Small bumps in the road can create a downward momentum that, in the absence of corrective action, will lead to recession. Right now, the only lever the Bush Administration has left to pull to reverse the current trend of deceleration is to do something about oil prices (since they are not going to be able to affect Fed policy or revise and extend their tax cuts before the election). However, they seem stubbornly disinclined to do so, so hold onto your hats, everyone.

Posted by: HT at August 11, 2004 12:31 PM

HT - Kudlow at NRO makes the same arguement - Bush should open up the SPR to bring oil prices down to help his reelection. Given how much scorn Clinton/Gore got for this in 2000 and the many times Bush said he wouldn't do something like this I doubt he will do it.

Posted by: AWW at August 11, 2004 12:45 PM


They're actually increasing the reserve, aren't they?

Posted by: oj at August 11, 2004 12:48 PM


That's a bogus measure though--we have the highest percentage of employment we've ever had, that even more say they'd work if a job bit them on the butt doesn't mean much.

Posted by: oj at August 11, 2004 12:52 PM

OJ: I don't know where you get your "highest percentage of employment" statistic. I'm going by the Household Survey, which identifies the labor force participation rate. At 66.2, it is down approximately 1.1% from its peak of 67.3 (which was in 1999 or early 2000, I think). Unless you assume that we have added almost nothing but unemployables to the working-age population since that time, these are people who should be looking for work but aren't. This may also be having an effect on the slow growth of household income, by the way, another drag on the consumer sector. Signs of deceleration are all around us, the most recent being Cisco's guidance yesterday.

AWW: I know that the Bush Adminstration refuses to re-consider its policy regarding the SPR. Triple-chinned Spencer Abraham was on TV yesterday reiterating the point. In my opinion (and I thought of it before Kudlow), this is both pointless and dangerous. For one thing, the SPR is full enough to insulate us against everything but the "500-year energy crisis"-type disruption (to paraphrase the Army Corps of Engineers). For another, the price of crude is having a measurable effect on the economy, and a growing economy is the essential underpinning of our War on Terror, deficit reduction, and the Bush re-election bid. Finally, all they would have to do is say that they are CONSIDERING using it as a hedge against speculation and terror premiums and it would take the wind out of the currently hyperactive oil market.

The fact that they refuse to do so, putting this election in doubt (and running the risk of allowing a Kerry presidency, which would be an absolute disaster), is not a good sign.

Posted by: HT at August 11, 2004 1:20 PM


Yes, it's unnecessary for 67% of a population to be working.

Posted by: oj at August 11, 2004 1:28 PM

OJ: you're clearly addicted to one-liners, but they're still entertaining to read. And formulate responses to.

The implications of your most recent statement are that it's OK that the labor force participation rate is falling, and that it would be OK if it fell further. What would be the results? Declining household income (which drives 2/3 of the economy), declining government revenues (leading to higher budget deficits), and a growing group of people who should be working and contributing to the retirement system but aren't.

Other than that, though, swell idea. Keep 'em coming.

Posted by: at August 11, 2004 1:40 PM

Sorry, that last anonymous post was by me.

Posted by: HT at August 11, 2004 1:41 PM

OJ - yes I think they are still filling it.
HT - Bush saying he might release the SPR when he really doesn't mean it sounds too Clintonian for Bush. I do agree that while the long term calls for Bush not to release the long term changes abruptly if the short term leads to a Bush defeat.
HT - There has been anecdotal evidence that families are moving back to the 1 earner family model to avoid day care, prioritize the children, reduce other hassles, etc. which may help explain the decline in total labor force participation.

Posted by: AWW at August 11, 2004 2:28 PM

HT, good post. You are right to say that the economy is vulnerable to "small bumps" in the road. Bill Gross of PIMCO pointed out in a recent article that the excessive use of leverage in the economy will have the effect of magnifying any unplanned for shocks to the system.

Posted by: Robert Duquette at August 11, 2004 2:51 PM


The number already includes the retired, housewives, students, etc. who say "sure, find me a parttime job that pays alot and I'll work." There's no shortage of jobs.

Posted by: oj at August 11, 2004 2:51 PM

If, as Orrin says, the population is rising; and if, as the government says, there are fewer people working than there were in 2000, then it cannot be true that the highest proportion of people working is now.

If the function of an economy is to provide work, then ours has been expanding only a short time.

Posted by: Harry Eagar at August 11, 2004 3:46 PM

You write about economics?

There are record numbers and percentages of folks working the past few years. Even more say they would work if they could.

In 1920 0% unemployment would have meant what about 30% of the population was employed? Today it means what 70% plus.

Posted by: oj at August 11, 2004 4:16 PM