Financial Daily from THE HINDU group of publications
Wednesday, Jan 14, 2004
Financial Daily from THE HINDU group of publications Wednesday, Jan 14, 2004 |
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Money & Banking
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Insight Columns - Financial Scan US election makes Fed's task tougher S. Balakrishnan
ONLY a measly 1,000 jobs were created in the non-farm sectors of the US economy in December 2003 - far below expectations of 1,50,000 and upwards. The unemployment rate dropped to 5.7 per cent but this was the result of a shrinking labour participation rate. The jobs data were contrary to all other rising indicators - GDP growth, retail spending, business capex and confidence and falling weekly jobless claims, which have held well below the magic figure of 4,00,000 for several weeks running. Stocks reacted badly to the news with the Dow falling 133 points on Friday (a small recovery was seen on Monday). Bonds soared and the benchmark 2-year and 10-year yields slid to 1.66 per cent and 4.09 per cent from 1.82 per cent and 4.27 per cent before the release of the figures. The data seemed to buttress the Fed's argument that there is no need to tighten interest rates in the near future despite the increasing momentum of the economy. Idle capacity in manufacturing, increases in productivity (which are outstripping the increase in demand) and slack labour market conditions offer enough room for growth to occur in non-inflationary fashion. This message is being dinned into markets by practically all members of the Federal Open Markets Committee (FOMC), from its Chairman, Mr Alan Greenspan, downwards. The drop in bond yields is also partly the result of the Fed's benign interest rate talk. Although there is a widespread feeling that the Fed will not raise rates in 2004, the markets still believe that there could be a move. Complicating matters is the Presidential election. Officially, the Fed has complete independence in monetary policy and is free to act any time when conditions justify. But any rate rise in the second half would be a pretty sensitive political issue. Mr Greenspan and his colleagues have less than a six-month window to change track. Even though the December numbers were bad, they could be just a blip in an improving picture. The coming months are likely to see a jobs pick-up, with the global growth outlook vastly better, including that of Europe and Japan, not to speak of the derived benefits and spin-offs of accelerating growth in China and India. The surprise is that it has not already happened. The steep fall of the dollar is a significant booster to US exports and should help in reducing the trade gap. The Fed must hope that if there is an uptick in inflation - with buoyant commodity prices and the rising growth tide, it is surely a matter of time - it will occur in early 2004, paving the way for an end to its soft interest rate commitment, at least in language, followed by a gentle upward nudge well before the thick of elections.
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