Ethan Harris
Ethan Harris
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The best tack is to move by a quarter point, with the promise that there will be more cuts to come if the economy remains weak. You can't maintain that promise with big bulky rate cuts.
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The labor market's going to have a long, slow climb. Corporate America is going to use whatever means it can to boost output without hiring. They're going to wait and wait for confirmation that growth is really picking up before they move into serious job hiring.
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The Fed has made it clear that it will take quite ugly news to get them to move in advance of any clarity around the Iraq situation. That means the March 18 meeting seems too early to expect a cut.
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People will wake up and realize the war on terror has just moved one step forward,
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Only with very weak U.S. growth or a major drop in the U.S. dollar will the trade deficit improve on a sustained basis. The reason you need these dramatic movements is that the U.S. has, according to almost every study, an incredible appetite for imports.
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This is why people talk about radical moves down in the dollar. They just can't see an improvement of the trade balance happening any other way.
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In an ideal world, three simultaneous gradual adjustments would happen. The U.S. eliminates the budget deficit, China revalues by 30 percent and China works to rebalance growth more to consumption and less to exports. Of course none of this will happen and the pressure for protectionism from Congress grows.
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It's not as friendly as some of the other inflation numbers, but it's just one indicator. We have no inflation warning signals from any of the other major inflation indicators.
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It's not a question of a sudden explosion in prices. It's more an erosion of the low-inflation psychology.
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Everyone is all zeroed in on the consumer now, but the truth is that the consumer isn't the driver now. Confidence is picking up, but still at average levels. Wage growth is slow and the bulk of the tax cut is already in place. Finally, with all the debt people have taken out over the past several years the burden of paying monthly bills is leaving less for discretionary spending.
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The bond market went into this report looking for disaster. I think there's a sense of relief in the bond market.
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The basic story of the consumer is that he's OK in the near term and at risk in the medium term.
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The adjustment to higher prices has been fairly orderly. It's not a 70's style shock. Oil prices do have an effect on the economy but it's not dramatic. It's a problem but not at the top of the list.
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They keep fiddling with the language, and the general tone of the directive keeps getting a little less dovish. Being 'patient' sounds a little less like they're keeping rates on hold than a 'considerable period' -- though you'd need to study a dictionary closely to figure that out.