Commentary | |
The Fed's big dilemma
After a much weaker jobs report, will the Fed be forced to do another big rate cut later this month against its better judgment? Hopefully not.
NEW YORK (CNNMoney.com) -- The job market is in sorry shape. And that's going to make the Federal Reserve's job a lot harder.
The unemployment rate is rising and the nation suffered a third consecutive month of job losses, according to the latest figures released Friday.
With that in mind, what is the Fed going to do at its next policy meeting at the end of April?
Before the jobs numbers came out, futures on the Chicago Board of Trade were pricing in only a 20% chance that the Fed would cut its key federal funds rate by a half-percentage point.
After the jobs numbers, that jumped to a 42% chance.
(Investors are pricing in a 100% chance of at least a quarter-point cut.)
These are trying times for the central bank. Fed chair Ben Bernanke reluctantly admitted in Congressional testimony Wednesday that a recession is "possible." And San Francisco Fed chief Janet Yellen said in a speech last night that the economy has "all but stalled."
Yet, at the same time the Fed is fighting an economic slowdown, it also has to contend with rising inflation fears.
Some Fed critics maintain that the huge rate cuts since September are fueling inflation by weakening the dollar.
There is also growing dissension on the Fed itself. Two Fed members voted against the three-quarters of a point rate cut in March, saying they preferred less aggressive action. At the time, I pointed out that this could be a sign that the Fed's rate-cutting days may soon be coming to an end.
I still think that might be the case. After all, with rates at 2.25%, the Fed doesn't have much more room to keep lowering them.
If, for example, the Fed cut by another half-point at the meeting on April 30, the federal funds rate would then be only three-quarter of a points above the 1% low that rates wound up at following the last recession in 2001.
Even though the jobs numbers were not good, the prudent thing for the Fed to do with oil still over $100 a barrel is to just cut rates by a quarter-point to 2%.
There seems to be a growing sense that the economy is already in recession and that it may have started late last year. So it's no longer the time for the Fed to be aggressively easing.
Instead, it should be a time to sit back and see if the existing rate cuts are starting to work their magic - which they soon should since the impact of rate cuts usually take six months to a year to filter their way through the economy.
"The Fed should be in a wait and see mode," said Matt Kaufler, co-portfolio manager of the Touchstone Value Opportunities fund. "It acted in an unprecedented manner in the first quarter and now should stand back, observe how the markets function and measure its response from there."
Keith Hembre, chief economist with First American Funds in Minneapolis agrees. He said the Fed should not overreact to the jobs report. Even though it painted an ugly picture of the economy, Hembre doesn't think it was shockingly bad. Instead, it simply confirms that we're probably already in a recession.
"Clearly, this type of job report is recessionary. But I don't think there's any surprise here to suggest that the economy and labor markets are deteriorating at a more rapid pace than expected," Hembre said.
Hembre added that barring another Wall Street meltdown a la Bear Stearns (BSC, Fortune 500), the Fed should err on the side of caution with further rate cuts. That's because the Fed has taken many steps already to restore faith in the economy and markets.
In addition to the cuts, the Fed has injected hundreds of billions of dollars into the markets to help alleviate the credit crunch. There's also the Bear Stearns bailout (errr, "rescue.")
In fact, Hembre thinks a rate cut on April 30 might be the last one for some time.
"We've gotten some stability in the credit and stock markets now," he said. "Absent renewed panic within the markets, the Fed is done for a while after the April meeting."
For all of you paying more at the gas pump and grocery store lately, we can only hope Hembre is right
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