Headlines (Scroll down for complete stories):
1. Fed's Moskow: Too Early for Fed to Lower Rates
2. Baby Boomers Downsizing Earlier Than Parents
3. Oil Prices Plunge Below $53
4. Fed's Geithner: Big Dollar Reserves May Not Be Best
1. Fed's Moskow: Too Early for Fed to Lower Rates
Anyone hoping the Federal Reserve will be lowering rates some time soon may have
to wait a little longer.
While news concerning the U.S. economy has been upbeat, Federal Reserve Bank of
Chicago President Michael Moskow said it's still too early for the agency to
think about relaxing monetary policy and bringing down interest rates.
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Speaking at a business conference, Moskow said, "Although the recent news has
been favorable, risks to the inflation outlook remain."
He added that the threat of higher inflation remains "my predominant concern,"
and noted that "continued weakness in the housing sector is holding back
economic growth."
Even so, Moskow stated that, "The economy outside of housing is on good footing,
and I expect the pace of expansion in overall economic activity will move back
up to the trend."
On the same day the U.S. Commerce Department released its latest figures that
showed the U.S. trade gap narrowed for the third consecutive month in November,
the Fed president said, "Solid job growth should support consumer spending;
ample liquidity and profitable opportunities should sustain business investment;
and strong growth outside the U.S. should boost demand for our exports."
While core inflation, as measured by the personal consumption index, declined to
an annualized 2.2 percent rate in November from a high of 2.4 percent in
October, Moskow cautioned that the Federal Reserve policymakers have to be sure
that the improvement isn't merely "transitory."
In addition, the country's unemployment rate of 4.5 percent is still too close
to the level that might boost inflation higher.
He noted that economists said in a recent survey that the unemployment rate
would have to fall below a range of 4.5 to 5.5 percent to spur inflation. So
that means December's 4.5 percent unemployment rate is at the bottom of that
range.
"This suggests we need to be vigilant for the possibility of increases in
inflationary pressures," said Moskow who dismissed concerns that the weakness in
housing could trigger a more general economic decline.
In fact, with mortgage rates remaining low, mortgage applications filed with
major U.S. banks rose 16.6 percent last week compared to the previous week. The
average rate for a 30-year fixed-rate loan fell to 6.13 percent from 6.22
percent the previous week, which was the highest rate in eight weeks. The
average rate for a 15-year fixed-rate mortgage dropped to 5.85 percent from 5.93
percent the week before.
The rate for a one-year adjustable rate mortgage average 5.79 percent, down from
5.84 percent the previous week.
According to the Mortgage Bankers Association, application volumes had "plunged"
about 14 percent just before the holidays.
Another indication the economy is picking up is an announcement the Fed made
earlier in the week that borrowing rose at an annual rate of 6.2 percent in
November. That was the largest increase since a 6.8 percent rise in August.
Looking ahead, Moskow predicted that GDP growth will increase and over the next
year or so will average just below its potential growth rate. He went on to cite
several factors contributing to that — the continued solid underlying trend in
overall productivity; the labor market is "healthy"; lower prices for
energy-related products have boosted the real purchasing power of households and
businesses; despite a slowdown in the GDP, the majority of businesses remain
optimistic about the outlook for the state of the economy.
Editor's Note:
2. Baby Boomers Downsizing Earlier Than Parents
Though many thought it would be at least ten years before the first wave of baby
boomers decided to downsize and touch off another wave of home selling, there is
anecdotal evidence that the boomer generation is pulling up stakes now rather
than waiting for retirement.
According to The Christian Science Monitor, baby boomers in their 50s are moving
to smaller homes, condos, "active adult" communities, or apartments while they
are still working. Downsizing, says the Monitor, is not a function of income,
instead baby boomers tend to downsize as the nest empties and they don't require
as much space.
"Boomers may have an adventurous spirit, following careers, following dreams,"
says Carol Orsborn, co-chair of FH Boom, a marketing group that studies this
generation.
The Over-50 Council of the National Association of Home Builders says that
approximately 6 percent of Americans between the ages of 55 and 64 move each
year.
Boomers have an easier time letting go of material possessions, unlike their
parents. The older generation has a hard time divesting their possessions, says
Lisa LaCount, author of "1,001 Active Lifestyle Communities." "They have family
heirlooms and large pieces of furniture. They have a lifetime around them."
"Baby boomers will have an easier time parting with things," says Margit Novack,
president of Moving Solutions in Haverstown, Pa. "They're less invested in
things because of their monetary value. Boomers grew up in an age of everything
being disposable. Many are still working. They look for the most expedient way
to get rid of stuff."
However, boomers still require more space than their parents. According to Bruce
Nemovitz, a real estate broker in Milwaukee, boomers typically look for 1,800 to
2,400 square feet of living compared to their parents who preferred 900 to 1,200
square feet.
As this wave of downsizing continues, look for the inventory of larger homes to
remain on the market longer and for smaller, more affordable homes to sell
relatively quickly. But this new influx of potential buyers isn't great news for
the housing market. If boomers can't sell their large homes to the small pool of
generation X &Yers looking to trade up, prices will likely fall.
Editor's Note:
3. Oil Prices Plunge Below $53
Oil prices briefly traded below $53 a barrel today as U.S. inventories swelled.
In addition, Russian oil shipments through Belarus to the EU resumed after a
pipeline dispute was resolved.
Light, sweet crude for February delivery touched a low of $52.94 on the New York
Mercantile Exchange. Brent crude for February delivery fell to $53.39 a barrel
on the ICE Futures exchange in London.
U.S. inventories for gasoline oil rose 3.8 million barrels to 213.3 million
barrels while heating oil stockpiles increased 5.4 million barrels to 141
million barrels, according to the U.S. Energy Information Administration (EIA).
Both inventory levels were higher than expected.
"The market is overwhelmingly bearish and in Asia, the market is reacting to the
very bearish product increase which went up quite a bit," Victor Shum, an energy
analyst with Purvin & Gertz in Singapore, tells the Associated Press.
Shum points to institutional money flowing out of oil and energy stocks.
MoneyNews readers will recall an article earlier this week, which speculated
that hedge funds, mutual funds, and pension funds could begin to sell out of
their considerable oil investments. MoneyNews said that if that happens, oil
prices could return to $40 a barrel.
"The financial market is rebalancing its portfolio and shifting money out of
commodities. Oil has been plunging together with metals," Shum said.
"Speculators who for years bet on rising energy prices have started adding to
bets on falling prices, according to the latest U.S. government data," adds the
AP.
So how close are we to $40 oil?
"I've already said last year that oil prices should be going towards $40 a
barrel so there's nothing special. It's no surprise to see it drop below $55,"
said Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures in
Tokyo.
Editor's Note:
4. Fed's Geithner: Big Dollar Reserves May Not Be Best
A large accumulation of dollars in official reserves has helped keep U.S.
interest rates low and pushed U.S. asset prices higher, but it could ultimately
hurt long-term growth, New York Federal Reserve Bank President Timothy Geithner
said Thursday.
"If they are large enough, they have the potential to alter or distort current
decisions about investment and consumption in a way that could be detrimental to
our longer-run growth prospects," he said in a speech at the Council on Foreign
Relations, adding:
"And they are important because they work to mask or dampen the effects on risk
premiums in financial markets that we might otherwise expect to be associated
with the expected trajectory of the fiscal and external imbalances in the United
States."
Although the People's Bank of China does not disclose the breakdown of its
holdings, most analysts believe 70 percent are held in dollars because China
maintains a tight hold on how its yuan currency trades against the U.S.
currency.
China's official reserves are likely around $1 trillion, and some analysts
predict they will rise to $2 trillion by the end of 2010.
Asked in a question after his speech on the dollar's role as the most widely
held reserve currency, Geithner said the Fed and the U.S. government need to do
their best to preserve confidence in U.S. capital markets and fiscal policy.
"We will provide that broader economic policy framework that's going to make
this a place where you are going to see innovation and future productivity
enhancements," he said.
Fed officials rarely comment directly on exchange rates.
Geithner, who is a voting member of the policy-setting Federal Open Market
Committee, did not comment on the short-term U.S. monetary policy outlook in his
remarks.
Long-term interest rates remained relatively low, assets prices were higher and
credit spreads were low, but such conditions were not fully understood and it
was not clear how durable they would prove to be, he said.
Still, the acceleration of U.S. productivity in the latter half of the last
decade was likely to remain intact, and productivity growth was accelerating
outside the United States, particularly in some large emerging economies, he
said.
An increase in monetary policy credibility has led to lower inflation and more
stable inflation expectations, boosting growth and fostering benign market
conditions, he said.
"Better monetary policy has lowered expectations of future inflation and
inflation volatility and has contributed to lower risk premiums in general."
Geithner also said monetary policy alone was not enough to ensure an environment
for long-term growth, and restoring confidence in U.S. fiscal management would
be important, especially given the size of the U.S. external imbalance, now at
some 7 percent of gross domestic product a year.
Fiscal sustainability would also help adjustments of global imbalances to unfold
with less risk, he said.
© Reuters 2007.
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