NEW YORK (CNN/Money) -
It's the Fed's story and officials are sticking to it: the economy hit an oil slick and stumbled this summer but now it's back on track with jobs growing at a respectable rate.
That in a nutshell is what Fed chief Alan Greenspan told Congress Wednesday, following the script that had been tipped off by other Fed official's speeches over the past few weeks. And of course Mr. G. warned Congress again that the deficit is too big and the amount of money coming in to pay for baby boomers to retire is too small, unless some big changes are made pronto.
Easy for him to say: the Fed has nothing to do with setting the government's tax and spend policies. But it probably doesn't hurt to rub politicians' noses in it in hopes of stirring them into action.
So where does this all leave us?
Right back where we thought we were before some squishy job and consumer spending numbers led some to believe the Fed might take a vacation from its self-proclaimed rate hiking schedule.
Once again Wall Street expects the Fed to hike its key rate from 1.50% to 1.75% on September 21, and possibly to hike in November and December, too.
The reason for this doesn't seem to be that the Fed has a big inflation worry right now. Even the Fed's latest Beige Book assessment of the economy, compiled from anecdotal evidence assembled by it's 12 regional banks, said this week that inflation was flat or up modestly in July and early August. The same report said that while the economic recovery continued, growth had softened in some districts as consumer spending eased up.
The Fed's view, and the view of many Wall Street economists who support the Fed on its rate-hiking mission is that raising rates from such low levels will have little impact on the economy and will prevent a pickup in inflation down the road. That's why most believe, especially after listening to Mr. G., that it will take a lot more than a little softness to dissuade the Fed from hiking rates.
Never mind the soggy weekly chain store sales numbers of late or the disappointing auto sales numbers. They are countered by some good numbers on factory output and orders.
There are some voices of worry out there, like the economists at UCLA's Anderson School of Business. Their outlook released Wednesday says the economy is doing fine now, but the recovery is rickety because consumers are getting maxed out on spending. And if consumers get worried and decide to pay off debt, that could really rein in the economy.
For now, though, the basic message for investors is more short-term interest rate increases are probably on the way. And if the Fed and its supporters are right, the economy won't flinch, inflation will stay under control, and unemployed workers will find jobs. It's a story with a happy ending that everyone is hoping comes true.
Kathleen Hays anchors CNN Money Morning and The FlipSide, airing Monday to Friday on CNNfn. As part of CNN's Business News team, she also contributes to Lou Dobbs Tonight.
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