Why A Fall In Auto Output Won't Weaken The Fed's Will

Upcoming reports on industrial capacity utilization may well show declines in April and May, but that wouldn't necessarily deter the Federal Reserve from further tightening, cautions economist Carl Palash of MCM Money Watch, a financial-markets advisory firm. He calculates that declines in motor-vehicle output in the second quarter should shave at least half a percentage point from the industrial operating rate, which registered 83.6% in March.

The catch, says Palash, is that the Fed knows this. It also knows that the production decline is mainly due to General Motors Corp.'s decision to implement some model changeovers early, and to capacity constraints on the output of hot-selling light trucks. So even if overall capacity use falls, he says, "the Fed will still be inclined to raise interest rates if operating rates in other industries besides motor vehicles continue to climb."

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